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March 20, 1984
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Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 SEURU Military-Economic Advisory Panel 21 March 1984 Contents Tab A Talking Points Tab B Charter Tab C Biograhies of Current Members Tab D Evaluation of the Panel Tab E Reports of the Working Groups on Military-Economic Analysis Tab F Critique of the Last Panel Meeting Tab G Recent Western Press Articles on Soviet Defense Spending V Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B00420R000701450001-4 2O March 1984 ME190RANDUH FOR: Director of Central Intelligence FROM: SA/DCI/IA SUBJECT: Your Meeting with Your Military-Economic Advisory Panel (MEAP), 21 March 1984 1. You had requested that a meeting be scheduled with MEAP in advance of their next regularly scheduled bi-annual session. This session is part of your program to find out more about what your many panels are doing. Thus, there is no formal agenda for this meeting. Those in DDI/SOVA who have set it up, have billed it as a "getting acquainted" session. 2,. At Tab A are possible talking points for your use. Included are suggestions that you encourage the panel to continue their efforts in directing talented analysts our way. Among other suggestions that you night consider is the 'possibility that-the panel undertake 'a review of DI ' s military-economic analysis. At Tab B is a copy of the MEAD charter. Their focus is on Soviet-and Non-Soviet Warsaw Pact military-economic analysis and SOYA, for one, hopes that MEAP's efforts are not diluted through their involvement in diverse and unrelated undertakings. At Tab C are the biographies of the six panel members. MEAP's charter calls for a membership of nine--hence there are three vacancies and you may wish to obtain the views of panel members on possible new appointments. At Tab D is an assessment of MEAP's performance, and at Tab E are the assessments performed by MEAP on the subjects of Soviet military-economic analysis. At Tab F are the minutes of the most recent MEAP meeting, which occurred in November of last year. And finally, at Tab G are open press articles dealing with the question of Soviet military-economic analysis. 4. If I can do more to help in your preparation for this meeting, please call. stt i Approved For Release 2009/10/06: CIA-RDP86B00420R000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Iq Next 2 Page(s) In Document Denied Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 ? ? DCI TALKING POINTS 21 March 1984 Meeting with Members of the Military-Economic Advisory Panel 1. At this meeting the Panel will not be making any formal report to you and none of the members have indicated to SOVA any particular issues they would like you to discuss. Because the Panel recommended strongly the resumption of the publication of unclassified reports on the costs of Soviet defense programs however, you may wish to discuss that issue with them. 2. The following paragraphs outline some additional points you may wish to raise with them, in some cases to share your ideas and direction with them and in others to draw from them their own perceptions and reactions: -- On continuing need for the Panel. The DDI's military-economic products have in the past and will continue in the future to be subjected to considerable scrutiny and criticism. The issues of yreatest concern currently appear to be: the relationship between DIA's estimates and our own--where comparable measures are possible they are in essential agreement; and the flatting out of Soviet recourses devoted to weapons procurement--DOD is greatly concerned about our consumer's reaction to this because growth in recent years of US weapons procurement places it closer to the level of the dollar costs of Soviet procurement than at any time in the last 10 years. The Panel's insights on these issues are eagerly sought and you may wish to get their comments directly. How the Panel has been of use to us recently. The Panel's recent efforts in reviewing the Agency's estimates of Soviet military expenditures were thorough and fair in every sense. Their reports stated that the work was generally of high quality but also provided useful guidance and criticism. The external, independent review by the Panel is now and will continue to be of value in responding to an external critics. Their recommendations are of value as well and SOVA has dedicated most of its new positions in FY84 to upgrading the military-economic work (including research specifically on the military-industrial complex). Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 ? ? ? Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Possible future topics for the Panel. Special foKLUs by the Panel could be helpful to SOVA on subjects such as: ways to upgrade our estimates of resources for Soviet military R&D; techniques to improve the accuracy or at least reduce the uncertainty in our projections of Soviet forces; and reviews of CIA estimates pertaining to Soviet energy. In addition, if you might wish to discuss with the Panel the usefulness of having the Panel undertake a review of DIA's military-economic analysis. The Panel and the quality of DDI analysis. Strong analysts and excellent managers are the key to our efforts to providing a quality product to our consumers. We urge you to encourage the Panel to continue, as they have in the past, to recommend and indeed assist us in recruiting top-flight scholars for this work. Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Military-Economic Advisory Panel The Director of Central Intelligence has established the Military-Economic Advisory Panel (MEAP) to provide a continuing review of the US Intelligence Community's military-economic analysis of the Soviet Union, China, and other Communist countries. The Panel will focus its attention on research relating to: The economy of the USSR, particularly as this relates to Soviet defense activities and capability. Economic, political, and military considerations that determine the size, pattern, and direction of the Soviet defense effort. Such other topics that may be specified from time to time by the DCI. In so doing, the MEAP will -- Review and critique the data, concepts, and methodologies used in military-economic estimates as well as the appropriateness, form, and scope of reporting the research findings. - Examine alternative methodologies, and recommend actions--including the creation of new research areas--to enhance existing analyses. Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 ' Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Military-Economic Advisory Panel The Director of Central Intelligence has established the Military-Economic Advisory Panel (MEAP) to provide a continuing review of the US Intelligence Community's military-economic analysis of the Soviet Union, China, and other Communist countries. The Panel will focus its attention on research relating to: The economy of the USSR, particularly as this relates to Soviet defense activities and capability. Economic, political, and military considerations that determine the size, pattern, and direction of the Soviet defense effort. Such other topics that may be specified from time to time by the DCI. In so doing, the MEAP will -- Review and critique the data, concepts, and methodologies used in military-economic estimates as well as the appropriateness, form, and scope of reporting the research findings. - Examine alternative methodologies, and recommend actions--including the creation of new research areas--to enhance existing analyses. Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 ' Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 CONFIDENTIAL ? MILITARY-ECONOMIC ADVISORY PANEL EVALUATION 1. The Military-Economic Advisory Panel (MEAP), which was formed in 1976 by the DCI, has provided a continuing review of the Intelligence Community's military-economic analysis pertaining to the Soviet bloc countries. The Panel primarily focuses attention on research relating to the economics of the Soviet defense effort, the economy of the USSR, particularly as this relates to the burden of Soviet defense activities, and the economic, political, and military considerations that determine the size, pattern, and direction of the Soviet defense effort. In doing so, the MEAP reviews and critiques the data, concepts, and methodologies used in military-economic estimates as well as the appropriateness, form, and scope of reporting the research findings. Moreover, it examines alternative methodologies and recommends actions to enhance existing analyses and investigates and recommends ways of establishing limits and benchmarks with which to check the reasonableness of existing estimates. 2. During the Panel's regular two-day meetings, which are held in May and November each year, the Agency's managers and analysts concerned with military-economic issues have benefited from the give and take at these sessions. The Panel's expertise has proved valuable over the years of controversy surrounding the 5 level and trend of Soviet defense spending. Those members who are economists have provided an independent evaluation of new intelligence in this area. The members with past government experience in national security Agencies have advised on a more efficient manner of communicating new information, and the weapons-oriented members as well as the economists have evaluated alternative approaches to estimating the Soviet defense effort in monetary terms. The Panel also has identified areas of concern requiring increased analytical effort, has recommended changes in the organizational structure of the military-economic effort, and has suggested undertaking high priority projects of interest to the consumer. In all, the MEAP has provided the DCI and DDI with an independent evaluation free of institutional interest in the results or implications of the military-economic analysis. 3. During the past year, five members of the MEAP served with a special working group that reviewed our economic analysis of Soviet defense activities. one conclusion they reached was that the Panel itself could enhance its contribution by narrowing the focus of its attention. Whereas the Panel at times has sought to enlarge the scope of its interests to Chinese issues, technical collection programs, and studies of the institutional environment within which Soviet policy is decided and implemented, the focus now will be fixed on the complex problem of military-economic analysis. Meanwhile, consideration will be given to qualified candidates to fill the three vacant positons on the Panel. We believe that informed criticism offered by the MEAP in the area of military-economics will redound to the credit of the Agency and the Community. Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 REPORT OF THE WORKING GROUP ON SOVIET MILITARY ECONOMIC ANALYSIS 0 July 20, 1983 Chairman Chairman, Methodology Panel STAT STAT STAT STAT 0 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 0 TABLE OF CONTENTS Introduction .........................................1 Uses .................................................3 Methodology ..........................................8 Recommendations .....................................15 0 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B00420R000701450001-4 REPORT OF THE WORKING GROUP ON SOVIET MILITARY ECONOMIC ANALYSIS INTRODUCTION The Working Group on Soviet Military Economic Analysis has finished its review of the CIA estimates of Soviet military expenditures. Our instruc- tions were to address three questions: 0 - How good are the current estimates of Soviet military expenditures and how can they be improved? How are the estimates used and how can they be made more useful? Given the intrinsic uncertainties in the estimates and the uses to which they are put, would it be better not to publish some (or all) of the estimates? The working group chose to attack the problem as analysts rather than as a blue-ribbon panel of experts representing divergent individual views. By this distinction we mean the following: The group built up a consider- able record of transcripts and documents, seeking data on precisely how the estimates are made and used, and collecting opinions from a wide range of users and observers on strengths and shortfalls. The group then drew its conclusions based on the record rather than on the previous knowledge and opinions of its individual members. In contrast, a blue-ribbon panel would encompass the entire responsible range of opinion and attempt to find common ground among the views and expertise brought to the panel by its disparate momhPrs_ Approved For Release 2009/10/06: CIA-RDP86B00420R000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B00420R000701450001-4 and one on uses, then We divided into two panels, oneoevaluatmethodology and reach our conclusions. met as a single group to perform our The methodology panel received extensive testimony from the Offihee of Soviet Analysis (BONA) within the CIA's Directorate for Theelaneln also interviewed that prepares Soviet military economic st1matesanalyses. a bases for further analyses estimates a number of people who use the CIA and who hold expert opinions on the methodology that goes into the esti- mates. Outside observers and academic critics of the estimates also testi- fied. The uses panel interviewed staff members from most of the relevant congressional committees and Pentagon, State, and White House officials, past and present. In reviewing the dollar and ruble estimates of Soviet defense programs, process b which we made one very important decision: we did not review the proc y men the underlying military quantities -- forces, manpower, items of procure -- are estimated. We concentrated, instead, on the ricin of these quanti- ties, largely because most of the controversy on the CIA estimates es hass on centered on problems of valuation. However we are aware that quantities, between CIA on the one hand and DIA on the other, have arisen from time to time. There are three parts to the final report. The first is this document ens, containing the overall evaluation and the executive directedr to is the profess- ionals second is the report of the methodology panel ionals in the intelligence community. The third document will be an aonoxogy that we have asked SOYA to prepare, documenting in one place currently used by the CIA in making the dollar and ruble estimates. It the both necessary and opportune to prepare this annex. Necessary because current estimates are very badly misunderstood both inside andoutside the intelligence community; opportune because SOYA witnesses presented more Approved For Release 2009/10/06: CIA-RDP86B00420R000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 thorough yet concise description of their methodology than is available anywhere else. USES Our principal findings concerning uses of the estimates are as follows: 1. There is a truly amazing lack of understanding -- both by users and by other analysts -- of what the estimates of Soviet military expenditures represent, how they may be used, and how they are developed. Even analysts outside the CIA who work regularly with these estimates have glaring gaps in their knowledge of the estimates themselves and conceptual blind spots in regard to what the various estimates signify. The dollar estimates of Soviet military spending are conceptually rather straightforward. The CIA first estimates the "q's," or quantities, of vari- ous items allocated to the military establishment each year. These quantit- ies are then priced in dollars. There are, of course, many technical prob- but the lems in developing dollar valuations for the military quantities; principle is clear -- it is an attempt to put a measure on the military goods and services procured by the USSR in one year, in the dollar units familiar to US policymakers, which can then be compared with the US budget for acquiring the same military goods and services in the same year. The military spending estimates do not measure relative capabilities. They do not even price the capabilities of the two military establishments at a given point in time. For this purpose, one would have to price stocks, taking into account inventories, obsolescence, and other sources of depre- ciation. Instead, the current procedures estimate the prices of annual flows or additions to the stocks. The estimates do not measure the base stocks at the beginning period or the depletions to stock through con- sumption or depreciation. "At what point in the In any pricing process there arises the question, process should the price be recorded?" The Soviet dollar prices reflect the 0 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 ? price at the point where the goods and services are delivered to the mili- tary, rather than the point at which inputs are first committed to military ends. 0 Dollar estimates of Soviet defense spending offer no clue to the Soviet military burden as the Soviets must see it. For these uses it is necessary to estimate Soviet military spending in rubles, which is more difficult to do. Dollar and ruble estimates are discussed at greater length below. Even this rudimentary picture of the role of dollar and of ruble esti- mates is not understood by many of the people who use and quote the esti- mates. There is also a widespread lack of knowledge, on the part of people who should know better, concerning the way the estimates are made. Gross errors in methodology were attributed to the CIA analysts without any justi- fication at all. 2. Related to the gross misunderstandings currently rampant concern- ing the economic estimates, many of the users quote or exploit the esti- mates in a way that reflects badly on the credibility of the CIA. The Soviet military expenditure estimates have been politicized over the past decade in the conflict between proponents and opponents of increased U.S. military budgets. The partisans of higher U.S. spending in the Pentagon or in the Congress tend to emphasize the Soviet-American gaps in the dollar calculations and not be concerned about the methodology of the dollar estimates, but they are frequently suspicious of the ruble burden estimates. On the other hand, those who oppose the Administration's defense proposals incline to be skeptical of both the dollar costing of Soviet forces and the validity of expenditure comparisons in general. We found a curious ambivalence on the part of congressional staff com- mittees, and in fact on users in general. On the one hand, most of the gov- ernment witnesses think that the CIA people do a good job and are honest in explaining their assumptions; on the other hand, many of the congressional staff expressed the belief that the dollar estimates in particular are pol- Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 . itically motivated and can be made to support any story that an administra- tion wishes to make. This suspicion of political motivation, when coupled with the 1976 major revisions of the ruble estimates and the current recal- ibration of the 1976-1961 procurement estimates, undercuts overall credibility. The finding that the CIA estimates are frequently misunderstood as as misused for political purposes suggests the posooflSovo that Soviet military should simply stop publishing or even preparing estimates expenditures. For reasons that we discuss below, we think this idoea is both undesirable and impractical. Instead, it is essential that C job of explaining, documenting and qualifying the estimates. Obviously, some users will not wish to heed the explanations and qualifications should accompany the estimates, but others will respond to better inform- ation. We recommend, in fact, the opposite action; i.e., that the CIA itself publish the estimates, that their meaning and limitations be ex- plained more fully, and that the CIA put restrictions on theirWush byeo her ap- executive branch agencies, requiring that they CIA should be prepared to propriate qualifications. In particular, and should push brief and explain its estimates more fully to the Congress, for the right of prior approval of descriptions of "the threat" in Depart- 0 ment of Defense statements and congressional testimony. 3. The estimates of Soviet military expenditures have other the users are generally unaware. The dollar estimates have an force the analysts to pay attention to military topics rect value -- they that would not otherwise get the care that they merit, such as maintenance policies, ammunition stocks, production, and mobilization base. These ct- topics are essential to an understanding of readiness and combat effe the iveness, but are well analyzed only because they so affect quantities to be priced as part of a dollar estimate. The dollar estimates support broad comparisons between US and Soviet forces, either intoto or by category. Examples are comparisons by mission Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B00420R000701450001-4 (e.g., strategic forces), by account (e.g., procurement or total invest- ment), or by theater, although the latter should cover NATO and Pact forces also, as discussed later. The dollar estimates are also a necessary inter- mediate stage in the development of ruble estimates. The ruble estimates, although more difficult to produce with confidence, are equally important to a wide range of professional users. The ruble es- timates are essential to any overall analysis of the Soviet economy, an obvious point when one realizes that the military economy comprises 1/6 to 1/7 of the overall Soviet economy. It is highly regrettable that CIA has ceased open publication of summary reports on Soviet military expenditure, in dollars and in rubles. The public dissemination of this information contributed to enhanced understanding of Soviet policy and of the Soviet economy and by feedback of criticisms and reactions helped improve the quality of SOVA's analytical products. The users were unanimous in their opinion that the various players in the defense debate --'the military services, the Secretary of Defense and I his office, the congressional committees and their staffs, and the genera public -- absolutely demanded a shorthand yardstick to compare US and Soviet military spending, as a surrogate for an overall comparison of capabilities. Several of the witnesses said that they would prefer or would settle for a comparison of investment-type expenditures (i.e., procurement, R&D and military construction) rather than or in addition to overall defense spend- ing comparisons. The service representatives need to continue to receive dollar compari- sons by service, while several OSD and congressional staff claimed that they would also use comparisons by mission area, at least for strategic forces. A widespread desire was expressed for matching up NATO versus Warsaw Pact, particularly for Europe-oriented forces. This desire seemed to come from two groups -- those who wanted to picture the "spending balance" in a light more favorable to the West, and those who believe correctly that, because so much of the USSR's forces are oriented towards NATO, a comparison of the re- Approved For Release 2009/10/06: CIA-RDP86B00420R000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 0 lative strengths of both alliances is necessary to obtain an accurate pic- In the current situation the CIA produces standard dollar comparisons, and then the advocates argue about the policy implications of these compar- isons. All parties argued strongly that this was a better situation than that which would be obtained if the CIA abstained from publishing dollar comparisons and each advocate published his own. In fact, the users all argued that the CIA should produce a wider range of comparisons and more fully describe and qualify these. As a practical matter, the Defense and Intelligence Committees argued that Congress would not let the CIA cease producing estimates and comparisons of military spending even if the CIA wanted to. In any event, the users all agreed that the objective of informed policymaking was better served by having an impartial body like the CIA do the comparisons, rather than having each advocate prepare his own. These three findings on uses, taken all together, lead to the following conclusions: 0 The CIA should continue to produce and publish both dollar and ruble estimates of Soviet military expenditures. The CIA should be more, not less, aggressive in explaining and sup- porting the estimates, including the dollar comparisons, and more assertive in assuring that the executive branch uses and qualifies the estimates properly. On the dollar side, comparisons of subcategories are useful: current comparisons by service, by mission, by account (i.e., procurement, O&M, manpower, construction). Comparisons not now made, e.g., by theater, or at least NATO vs. Pact in Europe, would also be useful. The latter comparison is difficult and would require much more work. - The ruble estimates are controversial and under appreciated. Al- Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 though these are required for a number of legitimate economic pur- poses, it is these estimates that also cause most of the credibility problems for the CIA. METHODOLOGY Our principal findings concerning methodology are the following: 1. Overall, and in spite of the range of deficiencies that we will de- the CIA does an excellent job of lineate in the next several paragraphs, a number estimating Soviet military expenditures. We will recommend otofb- badly needed improvements below. However these criticisms should our principal conclusion: the staff performing these estimates com- bines professionalism, competence, ingenuity, and interest in their work to a very high degree. 2. There is a single concept that underlies all of the dollar valu- ations of Soviet defense expenditures except those for R&D. This device, concept is the price that the US would have to pay to buy or make procure the service, using US production practice or prices but Soviet de- funda- sign, personnel, or operating practice. We believe that this iSO4a tlunea on mentally sound concept, quite appropriate for the limited uses, pp. 3-8, to which the dollar estimates can be put. To repeat, the primary use is to put a price on the basket of military products and services acquired by the USSR in one year for comparisons with the same products cand services that the US purchases. The secondary goal is to form cost estimates for those accounts -- procurement and O&M -- in which the ruble estimates are developed from the dollar estimates. 3. The R&D estimate is made on a different conceptual basis from the dol- others. Instead of trying to decide how much it would cost then in the lars to produce the same technical advances fresourcehinputseto Soviet mili- tary tries to estimate the dollar value tary R&D, which is the concept of the ruble measure. The current method- Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B00420R000701450001-4 ? ology of estimating the ruble value of R&D, which is then translated into dollars, is based on a limited foundation of evidence. Alternative meth- odologies are now being investigated. Since R&D comprises a major share of the total value of Soviet military expenditure, introduction of an alter- native methodology is of the highest priority. In the meantime, improve- ments in the current estimating basis can still and should be made. 4. Several criticisms are repeatedly voiced concerning the dollar est- imates, but we have found most of these to be groundless. Three of the most commonly heard are: That the dollar estimates of Soviet military pay are severely mis- leading. If US pay increases, dollar valuations of both Soviet and US military spending increase, hardly affecting the comparison. Fur- thermore, the ratio of US to Soviet military pay shows less change going from dollars to rubles than do the ratios for procurement, O&M or any other account. In large part this is because the Soviets use higher ranks in a given job than would the US, offsetting the higher US pay for a given rank. Both the dollar and ruble pay estimates are meticulously prepared and are among the most reliable of any of the military expenditure estimates. That the CIA fails to take into account technological improvement in Soviet weapons and thus understates the dollar prices, as well as the ruble unit values derived by translation from dollar prices, of modernized Soviet weaponry. This charge reflects misunderstanding of the CIA procedures, which do attempt to allow for qualitative change over time. - That the CIA uses learning curves incorrectly, and thus underesti- mates procurement costs. Learning is a real phenomenon that does reduce military costs, and we believe that SOVA uses learning curves in a conceptually correct and careful way -- by applying learning at the component and sub-assembly level rather than by entire weapon 1P system. Approved For Release 2009/10/06: CIA-RDP86B00420R000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 5. The recent change in the estimates of procurement growth demon- strate an important fact: even spending estimates for recent years, al- though they ostensibly refer to realized expenditures, in fact contain forecasts. In particular, estimates made for the immediate past two or three years are really based on limited information, and have the range of uncertainties associated with forecasts. Spending estimates for periods three to four years in the past are only slightly revised in successive updates and therefore can be considered as having high confidence. More- over, estimates for the more recent past cannot be used to support conclu- sions, for instance, about rate of growth of Soviet military spending in the last two or three years. This point is extremely important. Estimates of Soviet military spending are not accurate enough to decide if.this'year's or next year's military budget is growing faster or more slowly than the overall Soviet economy. 0 6. The ruble estimates serve a range of analytical uses and policy is- sues as important as those for which the dollar estimates are made, since the ruble estimates relate the military economy to the overall economy. Questions of burden and of growth can only be answered in the context of ruble spending. Any serious analysis of overall Soviet economic perform- ance must deal with the military economy in ruble terms. Unfortunately, some of the most difficult conceptual and practical problems in estimating Soviet military expenditures occur in trying to make ruble estimates that will adequately address those issues. One of the prob- lems with ruble pricing is that the ruble price basis is now very old -- military expenditures and GNP are estimated in constant 1970 prices. SOVA is now engaged in an effort to update the price basis of the estimates to 1982, the year of the latest major Soviet price reform. This is a very high priority task. This updating must include national income accounts, Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 as well as military spending accounts. is the limited A second problem, at least in the procurement account, amount and range of ruble price information. There are several was aavail- able to improve ruble pricing. One is to make greater use of the extensive ruble price spite of the problems lists we have for foreign trade items, in sroduction for that these involve. A second is to estimate SoveSttmcost atesoshould provide many of the major military systems. These cost prices are updated plausibility checks on the ruble mites, especially once priceetup a to 1982 rubles. A third is to study and learn more about price particularly the profit component, in Soviet defense industries. 7. The CIA estimates of Soviet military expenditure in rubles and Soviet defense burden are well thought out and carefully drawn. their own frame of reference, these are meaningful calculations. However, there are two purposes for which complementary calculations are desirable. First, the Agency seeks to approximate an estimate of burden as Soviet de- cisionmakers might calculate it. But the Soviets do noWe measure They use of their economy in terms of gross national product as concept of net material product, which excludes services. Therefore, to calculation of burden in these terms ought also to be made, trace the trend. Second, it is to be expected that the Soviets use current, not constant, ruble prices to measure military spending. The Agency wishes to estimate the true opportunity costs of Soviet military activity, from a Western point of view. Comparisons of US and Soviet military spending are done on a comparable basis, but the definition opposed burden t of Soviet military spending is too narrow tofburdenheasfull to US- Soviet defense puts on the Soviet economy. For Soviet Soviet comparisons, one should reflect the importance of the following items, listed in increasing order of difficulty to quantify- - Civil defense - Costs of maintaining reserve defense production facilities 0 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 40 - Mobilization base - Construction, such as extra highway costs and railroads - Strategic reserves of grain, petroleum, etc. - Opportunity cost of running defense industry on a separate supply system. 8. The ruble estimates also suffer from a conceptual problem which has become significant in light of the observed procurement slowdown. The ruble prices are fixed at the same point in the resource flow as are the dollar prices, i.e. when acquired items pass into the hands of the mili- tary. This methodology can be described as one of pricing outputs, not inputs. If procurement costs go up due to falling productivity, bottle- the cur- necks, technical or production problems, or other such problems, rent methodology will not catch these increases until the Agency succeeds in transferring the estimates to a new price base. We literally do not know whether the Soviets have deliberately kept procurement investment constant for the last five years, or are merely having trouble getting new deliveries out of their procurement pipeline as fast as the flow of re- sources into production is rising. However, with the current methodology both explanations would show up in flattened estimates of ruble procurement expenditures, whereas intuition requires rising expenditures if they keep increasing inputs. This point is extremely important because it bears on the assessment of changes in the burden. Although the ruble military expenditure series is essentially a quantity index with 1970 price weights, it was legitimately interpreted as a measure of real change in expenditure as long as there was no evidence of divergence between growth of inputs and outputs. If such a divergence has been taking place, the Agency series will not reflect the real change in burden. This limitation must be carefully explained in the ruble expenditure paper. 9. There is some benefit in comparing the Soviet-US spending ratios expressed in both dollars and rubles, on the expectation that the ruble Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 ? ratio will be lower than the dollar ratio, and that the "truth" lies some- where in between. The CIA is subject to legitimate academic criticism for not publishing the ratio expressed in rubles, and hence exaggerating the Soviet spending excess. To allow for this, the CIA does attempt to reprice US military spending in rubles in order to compare it with Soviet spending in rubles, but the resulting ratio is used mainly to show that the two ratios differ by less than 15-20%- The working group is split on the implications of this statement -- the Chairman believes that, all in all, the work that would be needed to perform US ruble estimates is better invested elsewhere. The methodology panel believes that more effort should be invested in improving the US ruble estimates and in incorporating them into the analysis of US-Soviet comparisons. 10. The basis for all Soviet military expenditure estimates is a building-block, bottom-up approach. Although this is the only approach that can produce the accuracy and detail required by the many uses to which the estimates are put, there is always the risk that components not easily visible as major blocks will be left out. In order to check overall plaus- ibility of these estimates, it would be desirable to concurrently prepare a top-down gross estimate via an alternative methodology, utilizing Soviet economic and financial statistics to derive estimates of concealed military outlays in the announced reports on the state budget, net material product and output of the machinery industry. These methods have been tried in the past with anomalous results. However, it is important to continue monitor- ing the data sources to see whether better results can be obtained. 0 11. It would be moderately useful to have comparisons of Europe- oriented NATO vs Europe-oriented Warsaw Pact military spending. It would make no sense merely to total up the spending of the alliances, since mem- ber states have dissimilar worldwide obligations and forces. Therefore, to get a meaningful comparison it would be necessary to disaggregate Soviet (and US!) forces by theater before trying to put pricing of the forces of all the alliance states on a common dollar basis. Soviet order-of-battle are kept on a theater basis, but the same is not true for the theater-ori- Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 ented rear forces and activities. Disaggregation would be a very large ? job. The quantity estimates for eastern Europe are poorer than those for the Soviet Union. Pricing factors in dollars for both eastern and western Europe would be necessary for a wide range of equipment, operational prac- tices, military pay, and manning policies. 12. Organization and resource questions enter as well. The recent SOYA reorganization substituting regional for functional offices was in- tended to allow cross-cutting interdisciplinary studies to take place, an objective which is to be commended. However cross-cutting studies can be effective only when they integrate well-done component analyses in the in- dividual functional areas. When the total amount of resources devoted to analysis are thin, as appears to be the case today, redirecting efforts to the major cross-cutting studies at the expense of the component analyses means that the component analyses will suffer, and these major studies will be built on a shaky foundation. Since the military economic estimates are component analyses, they have suffered badly from the redirection of effort under the SOVA reorganization and the consequent reduction in the number of analysts doing these estimates. These effects were also reflected in the 1982 update, which proceeded much more slowly and with greater difficulty than did earlier ones. We think that it is a serious mistake to no longer have a single point of focus for military-economic analysis within SOVA. By splitting up these estimates among the various branches SOVA has lost the centralized method- ology, discipline, and continuity that characterized these estimates in the past. 13. SCAM, the computer program that is used to generate the economic estimates, is obsolete and needs updating or replacement by a modern pro- gram with interactive data entry and editing, a data base management sys- tem, and various other data processing improvements. SOVA is now working out a follow-on system with the aid of an outside contractor. The panel expresses its support for this effort. 0 14 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 RECOMMENDATIONS Our recommendations fall into three categories. The first set might best be characterized as policy recommendations dealing with the objectives and management of the program as a whole. The second set deals with inter- actions with the using community; while the last set deals with methodolo- gy. Since methodology recommendations carry resource implications, we place relative priorities on this set of recommendations. Additional re- commendations are contained in the report of methodology panel. Policy 1. Because the overall military economic program is worthwhile and, in fact, demand for results exceeds the current capacity of the analysts to produce, the program should be continued and at a higher level of resources than is currently available. 2. A single, SOVA-wide coordinator for military expenditure estimates should be appointed. This is a top priority item. Continuity of assign- ment for the analysts is also required. 3. When estimates are published within the government (whether or not on a classified basis), the CIA should affix mandatory qualifications. Qualifications on dollar estimates should deal with their limited scope of application. Qualifications on ruble estimates should deal with uncertain- ties involved in inferring burden and trend. Authority over intelligence data within the executive branch should be established, such that these data may not be published or quoted without the mandatory qualifications. 4. One should distinguish between retrospective analyses of historical data, on the one hand, and forecasts or analyses of policy alternatives on Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B00420R000701450001-4 the other. The former should be published widely and on an unclassified ? basis as far as security will permit; the latter should be kept in govern- ment channels. Summary ruble and dollar expenditure reports should be published regularly and in unclassified form, too, as far as security considerations will permit. SOVA's existing efforts to engage outsiders in helping to improve its analytical product deserve encouragement and support. 5. Because the Soviet R&D estimates are so poor, they badly distort estimates of Soviet military spending. Until the R&D estimates can be improved, therefore, overall comparisons of US and Soviet military spending should exclude R&D spending from both totals. User relations 1. The basis for both the dollar and the-ruble estimates should be aggressively explained and briefed with emphasis on what these-are supposed to represent and limitations on their applicability. One possibility is to have a separate spokesman/briefer on the topic. 2. The annex documentating current methodology for making the esti- mates of Soviet military spending, as discussed at the beginning of this report, should be prepared. 3. It would probably be worthwhile to organize an annual users group to confer on the current state of the estimates and to discuss the research plan for the coming year. Methodology 1. The current methodology of estimating Soviet ruble R&D should be reviewed, making fuller use of the accessible information. To the extent possible, the work on alternative ruble and dollar methodologies should be accelerated. This is a top priority item. 0 Approved For Release 2009/10/06: CIA-RDP86B00420R000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 2. The current effort to replace the 1970 ruble price weights with 1982 prices should be encouraged and fully supported. This is a top priority item. 3. To compare military spending with the size of the overall economy, one needs a good estimate of the size of the overall economy. GNP method- ology should be reviewed and Soviet GNP estimates prepared in 1982 ruble prices. 4. The sources of data and analysis used to derive ruble prices for procurement can be expanded. Possibilities include use of foreign trade ruble prices and estimates of cost of production for military items. More detail is given in the methodology paper. This is a high priority item. 5. While the ruble price basis is being changed, special studies should be performed to evaluate the possibility that productivity is declining in the industries that produce defense items. Inputs may be rising faster than outputs, making ruble procurement estimates, computed according to the current methodologies, overstate defense procurement. 6. In performing Soviet burden calculations, the impact of the addi- tional coverage items described in paragraph 7, p. 12 above, should be examined. This is a medium priority item and should be part of a longer term effort to describe the impact on the overall Soviet economy of the extensive militarization of many civilian sectors. 7. A program should be initiated to review the alternative, top-down methodologies for verifying the building-block estimates. This is a medium priority item. 8. A longer-term program should be initiated to concentrate on NATO and Warsaw Pact forces. This requires a number of steps: disaggregation of 17 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Soviet forces by theater; determination of pact quantities other than of battle; pricing of pact forces, each in its own currency; d sa99 riorit forces by theater; pricing of NATO forces. This is a lower p Y+ of US -term program, but some plan should be developed in the near term. long , lace SCAM with a new system. 9. A move should be made quickly to rep the standard OMB circular The first step should be a requirements study of significant efficiencies in A-76 type. The study should identify An objective is to decide if a the use of analysts' time can be effected. .will suffice, or if a new system simple reprogramming using new technology design is required. 0 0 is Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B00420R000701450001-4 ? Report of the Methodology Panel of the Working Group On Soviet Military Economic Analysis July 1983 0 Methodology Panel Chairman of the Working Group Approved For Release 2009/10/06: CIA-RDP86B00420R000701450001-4 STAT STAT 0 Approved For Release 2009/10/06: CIA-RDP86B00420R000701450001-4 CONTENTS 0. OVERVIEW AND KEY FINDINGS............................ 3 I. INTRODUCTION, ...................................... 9 A. Origin and Mandate............................... 9 B. Scope of the Review.. ..... o.o.-o-oo ..... o-o-oo---1O C. Assessment Criteria ...................5....5.....11 D. Contents of the Report...........................12 II. CONCEPTS AND METHODOLOGIES ...........................13 A. General Analytical Rationale...... ...............13 B. Dollar Costing Concepts and 14ethodologies........16 Co Ruble costing..... ... o.o.o .... ... oo***.23 D. RDT&E ............................................28 E. The Burden of Defense........... .................30 F. Ruble Valuation of U.S. Expenditures........ ..... 34 III. VALIDITY AND RELIABILITY OF THE ESTIFtATES........ ....37 A. The Strategic Cost Analysis hlodel ................37 B. Comprehensiveness of the Estimates.......... ... o.38 C. Robustness of the Estimates ...................... 41 D. Biases and the Critics ...........................45 IV MANAGEMENT ...........................................51 V. RECOMMENDATIONS ......................................55 10 APPENDIXES A. U.S. Government and Non-government Observers Consulted by the Methodology Panel ...............59 B. List of Supporting Materials Submitted by Observers Consulted ..............................61 SECRET 2 Approved For Release 2009/10/06: CIA-RDP86B00420R000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 SECRET REPORT OF THE METHODOLOGY PANEL OF THE WORKING GROUP ON SOVIET MILITARY ECONOMIC ANALYSIS 0. OVERVIEW AND KEY FINDINGS This report by the methodology panel of the ad hoc working group assembled by the Deputy Director for Intelligence, CIA, is concerned with the quality of the methodology used by SOVA to estimate the ruble and dollar costs of Soviet military activity, the burden of Soviet defense, and the ruble value of U.S. military programs. The panel has been concerned only with costing, not with the estimates of physical quantities, and it has focused on the estimates made in recent years. The quality of the estimates is assessed in terms of their replicability, appropriateness of valuation concepts, fidelity of implementation of the concepts, plausibility, accuracy and robustness. The need for such estimates arises in two main contexts: (a) measuring the comparative resource inputs into military activity in the United States and the USSR, for which purpose dollar costs are one of two theoretically appropriate sets of trade-off relationships, the other being rubles; (b) assessing the burden of defense on the Soviet economy and society, for which rubles are the most appropriate yardstick. The indicator of comparative resource inputs that is the CIA measure, whether both countries' activities are measured in rubles or dollars, is to be sharply distinguished from measures of military capability, which require estimates of the military capital stock, adjusted for depreciation and obsolescence. Military expenditure aggregates cannot readily be framed for that purpose, largely because of: the dependence of military capabilities on scenarios envisaged for the use of force and on such military intangibles as leadership and morale; non-optimal defense procurement decisionmaking; the problems of calculating depreciation and obsolescence; and the practical difficulty of developing estimates of physical stocks in the United States. One of the increasingly important tasks of Agency presentation of the estimates, in oral or published form, is making sure that users understand which questions the estimates can be used to address, and which they cannot answer. The panel finds that the conceptual criterion guiding the production of dollar costs of Soviet defense is well-thought out and appropriately chosen among the alternative concepts. CIA measures the flow of resources to military uses at the point where goods and services are acquired by the military forces, and they value the quantities involved at the cost in the United States of buying the particular item--that is, in its Soviet configuration and design, but with allowance for U.S. production SECRET 3 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 SECRET . 0 techniques and factor proportions. With the exception of RDT&E, discussed separately below, the estimates are generally successful in achieving consistent execution of that rationale. Our major conclusions regarding "the dollar estimates are: ? Personnel costs are one of the most meticulously estimated parts of the whole system of estimates, applying U.S. pay rates and allowances to a detailed breakdown of the Soviet forces by function. ? Procurement costs have been sharply improved by shifting to contractor studies producing engineering analyses or more sophisticated improved cost estimating relationships. We find room for improvement in the effective guidance by the Agency of these contractor studies, but the quality of procurement estimates is now high. We believe criticism of these estimates on the grounds of failing to take technical progress into account or improper accounting for learning in production to be unfounded. ? Improvement in the procurement account should also have benefitted the estimate of the dollar cost of O&M. 0 Except with respect to 1970 itself, the ruble estimates in 1970 prices must be seen as an intellectual construct rather than as an attempt to replicate an actual figure recorded somewhere in Soviet official accounts. Our major conclusions regarding the ruble estimates are: ? Personnel costs are one of the most satisfactory components of the total; they are estimated'on the basis of detailed ruble cost information and supported by an elaborate manpower model. ? Construction is first direct costed in rubles. The estimate has been raised sharply and improved significantly as a result of a new sampling methodology intended to get systematic coverage of less easily observed elements of military construction. The ruble cost factors are based on extensive Soviet information. S O&M outlays are estimated by norms relative to ruble values of equipment stocks and procurement costs. ? Procurement poses the most difficult challenge to cost estimation. Some items are estimated directly in rubles--ship hulls of major surface combatants, based on a Soviet merchant-ship estimating model, or some tanks SECRET 4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 SECRET 0 and aircraft, for which ruble prices are available. Others are converted from the dollar side with the aid of ruble-dollar ratios. The methodology of processing ruble prices and constructing average ruble-dollar ratios has recently been conceptually and empirically refined. The methodology now takes conscious account of uncertainty in the prices and attempts to minimize bias caused by uncertainty. However: 0 - The ship model needs updating at an early opportunity. -- There is a need for further analysis of Soviet price formation, the plausibility of the weapons prices in SCAM, and the uncertainty attaching to these prices. -- Insufficient attention has been given to the possibility of estimating ruble-dollar ratios from available Soviet foreign trade data as alternatives to or checks on currently used ratios. The panel has little confidence in the estimates of RDT&E in either rubles or dollars. Up to 1979 the starting point of the ruble estimate was the official series on total science expenditures. The 1970 update substituted a calculation based on manpower numbers, the average wage in R&D and the share of wages in total R&D outlays. Since 1980, the estimate is obtained by scaling down the implied growth rate of the 1970s to a little over 6 percent, on the basis of observations about the growth of military R&D facilities. The panel believes there is little evidential basis for any of these procedures. The conversion to dollars proceeds on the basis of an aggregate ruble-dollar ratio, one of whose components can no longer be reproduced by SOVA analysts. Studies of alternative approaches are underway, but the work is proceeding slowly and it does not seem likely that the results will be ready for introduction into the system soon. The panel recommends that until the alternative approaches are ready: More effort should be put into the present approach, and into making it more defensible, by more thorough exploitation of available Soviet data. The published analyses should skip lightly over the RDT&E numbers and exclude them from the totals developed. CIA estimates of the burden of Soviet defense, the ratio of SECRET 5 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 JtLKtI military expenditure to GNP (both in rubles) are widely misunderstood and heavily criticized. There may be shortcomings in the factor cost adjustments of both numerator and denominator, owing to insufficient information on Soviet prices. With this exception and in its own terms, this measure is well defined and executed. However: ? There is a need to develop a measure that incorporates a better evaluation of the greater degree of militarization of the Soviet economy relative to those of the West. Such a measure would take account of and attempt to measure activities excluded from the current definition--e.g., civil defense, maintenance of reserves for expansion of defense production, maintenance of mobilization potential, and the like. The subject of mobilization potential and strategic reserves deserves renewed study. ? In the broader measure, an effort should be made to reflect the full opportunity costs of the imposition of military priorities on the civilian economy. ? More thought should be given to measures of military outlay that Soviet leaders might consider in appraising the burden. ? The CIA measures of burden are also handicapped by using the prices of 1970, which are increasingly remote from present scarcity relationships. Programs are underway to change the valuation basis for the ruble estimates to a 1982 base. To accomplish this task a major effort will be necessary in 1984-85. The changeover will be incomplete, however, unless a set of national income accounts in 1982 prices is also developed. The panel is concerned that the SOVA team dealing with national income accounts is losing its key analyst. ? Shifting to a new price base will also enable SOVA analysts to deal more effectively with the problem that recently appeared of a possible divergence between the Agency's series for Soviet defense in 1970 ruble prices and changes in the physical volume of resources actually allocated to defense. Size comparisons of U.S. and Soviet military activities are and should be made in rubles as well as in dollars. CIA's ruble costing of U.S. defense is complicated by the difficulties of estimating U.S. quantities and the costs of producing U.S. equipment in the USSR. The panel finds: is SECRET 6 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 SECRET 0 ? The Agency's effort to compensate for the intrinsic difficulties of the calculation involves a number of adjustments relying heavily on judgment but which significantly undercut major criticism of these estimates. ? The spread between USSR/U.S. defense size ratios in rubles and dollars is smaller than those for other categories of GNP, but this probably reflects a tendency on both sides to produce forces in accordance with military, not economic, criteria. ? However, the ruble estimates of U.S. defense receive distinctly secondary attention in SOVA's work, and quality improvements in the methodology are possible. Size comparisons of annual flows continue to be misinterpreted in a capability sense. There is a need for estimates of weapons stocks, taking account of depreciation and obsolescence. The panel notes that there is considerable pressure for NATO- Warsaw Pact comparisons. This does not appear to us of the highest priority, but extension of the existing estimates to include non-Soviet Warsaw Pact countries would help respond to criticism of U.S. government use of Soviet-American comparisons alone. The Strategic Cost Analysis Model now used as the foundation of the costing effort has considerable power but also deficiences in its programming component. These are well appreciated by SOVA and a follow-on to SCAM is now being planned to eliminate most of them. The panel expresses its strong support for this effort. The Agency's work on methodologies for estimating Soviet military expenditure that are complementary to the building block approach has been intermittent and conducted at a lower level of intensity, in part because of doubts about the feasibility of attaining significant results with these alternative approaches. However, they have the potential of furnishing at least a partial verification test of the comprehensiveness of the building block estimates and therefore should be pursued more systematically. Except for the major revision of 1975-76, the estimates appear to have been relatively insensitive to refinements in concept and methodology or improvements in data collection over time, thus exhibiting a healthy degree of robustness. 0 The panel examined the management of the costing effort, SECRET 7 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 SECRET particularly in its reflection in the 1982 update. It finds: ? The 1982 update revealed the toll on military economics resulting from the regional reorganization of the Directorate of Intelligence,"in the course of which the Military-Economic Analysis Center (Division) was dissolved, and from reduction of the scale of the military-economic effort. The effect of these changes could be seen in prolongation of the update and difficulties in maintaining normal processes of quality control. On the other hand, the joining of military and economic research within SOVA enabled a more integrated approach to dealing with the questions raised by the apparent slowing of procurement growth. ? The military-economic estimating process requires a central focus to maintain quality control and evaluate new findings. ? The process is costly. With reduced resources, ways would have to be found to alter the mode of estimation and to reduce client expectations with regard to the questions posed to SOYA. However, the panel considers it unreasonable and impractical to cut back on quality and ability to respond to customer demands. It sees no way to avoid augmenting resource allocation to the effort. The panel has no doubts about the value of the estimating effort, in terms of the need for and the usefulness of the product, and in terms of the quality and analytical relevance of the estimates. We have high regard for the talents of those who have been responsible for development of the estimates over time. We recommend strongly that the effort be continued and supported appropriately. SECRET 8 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B00420R000701450001-4 0 0 1. INTRODUCTION A. Origin and Mandate At the request of the Deputy Director for Intelligence, CIA, an ad hoc working group of non-government experts was assembled to conduct an independent review of the CIA's Soviet military expenditure analysis program. The group was headed by DDI requested that the group consider "the accuracy of the estimates and the uses to which they are put, including the possible need for changes in methodology, analysis or presentation." Based on the above guidance, the working group determined that it would attempt to answer three sets of questions: 1. How accurate are the estimates that have been developed to date? What are the major gaps in information/data, and how severely do they affect the estimates? What are the strengths and weaknesses of the analysis of the estimates performed by SOVA? 2. To what uses are the estimates put? How well do they serve these uses? Are the estimates being misused? 3. If the estimates are not as useful as they might be, or are being misused by the consumers, should the effort be curtailed in whole or in part? Alternatively, could the estimates be made more useful by: (a) improvements in accuracy through changes in estimating methodology or by direction of more resources to the estimating effort; (b) improvement,in the analysis of the estimates; (c) changes in the methods of presentation of the estimates? The working group divided into two panels, the first concerned with the methodology and the second with the uses of the estimates. The task of the methodology panel, consisting of methodology or resources to be committed to the estimating effort. attention to a part of the third set covering changes in of questions. However, the panel also paid considerable The methodology panel conducted its investigation on the basis of extensive interviews, recorded and transcribed. Some 40-50 hours were spent interviewing SOVA analysts, in order to SECgRET was essentially to address the first set 25X1 25X1 Approved For Release 2009/10/06: CIA-RDP86B00420R000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 0 0 understand precisely what the current methodology is and how it has changed over time. In addition, the methodology panel consulted or conducted interviews with a considerable number of current and former officials of the U.S. government, as well as outside, non-government academic experts who were critical of the CIA estimates. A list of those consulted by the panel is included with this report (Appendix A) along with a list of the supporting documents submitted by several of the individuals consulted (Appendix B). B. Scope of the Review The subject of this inquiry is the CIA's estimates of Soviet military expenditure. By the estimates" we mean the Agency's calculation of (a) the dollar costs of Soviet military activities, (b) the ruble value of Soviet defense expenditures, (c) the ruble value of U.S. military programs and (d) the burden of Soviet defense as the ratio of defense expenditures in rubles to the gross national product in rubles. In addition, we will also refer to CIA-reworked values of U.S. budget outlays in dollars used to draw size comparisons of U.S. and USSR military activities. However, we have not reviewed the CIA procedures for developing these values from U.S. budget outlays. Several other disclaimers about the limits of this inquiry should be stated: 1. The panel has not reviewed the estimates of physical quantities--that is, manpower numbers, quantities of weapons procured, and the like. The report concentrates on the valuation and costing part of the military-economic effort. The distinction between quantity and value is a not always clear and in several categories of the estimates cannot be maintained. Thus, the presently used procedure for estimating R&D does not concern itself with physical quantities at all; much of operations and maintenance is estimated with the aid of norms related to values of procurement or stocks. Nevertheless, it remains generally true that estimates of quantities have been taken as given, and the methodology panel has inquired only into the validity of the valuations. 2. The panel has not attempted to trace the complete history of the estimating effort and to examine in detail the reasons for the changes that have taken place over time. In particular, we did not undertake to examine the justifications for the major change in the ruble estimates that took place in 1975-76. Our effort concentrated on the recent estimates and their formation. 3. An important disclaimer relates to the criteria of quality we have used in assessing the estimates, as is explained below. SECRET 10 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 SECRET 0 C. Assessment Criteria The panel's assessment of the estimates takes into account the following criteria for assessing the quality of the CIA's estimates. Replicability. There should be explicit documentation of data sources, definitions, estimating rules and assumptions, such that all the numbers in the system may be individually replicated. It is assumed that fully reproducible estimates are also free of calculating error. Comprehensiveness. The estimates should have the scope and coverage, in both concept and implementation, to meet the objectives of the measurement. Appropriateness of Valuation Concepts. The valuation concepts should reflect and fulfill the purposes of measurement and be consistent across the various categories into which the whole is subdivided. Fidelity of Implementation. The methodology of estimation should result in the creation of a system of prices, wages, unit costs, etc., which fully accord with the valuation concepts. Plausibility. This may refer to various stages of the results--to the units of valuation (prices, wage rates, or unit costs) or to aggregates at various estimating levels. Plausibility may be gauged against intuition--the numbers may have an apparent meaning and magnitude that is intuitively acceptable--or external evidence. Accuracy. Accuracy is generally understood as accord with an empirical reality--for example, Soviet outlays on R&D. The accuracy of such an estimate may be tested by developing alternative measures of the empirical referent. When the estimate bears on an intellectual construct of the system under examination--for example, the dollar cost of Soviet military programs--the accuracy of concepts and methodology can be gauged only in the sense of conformity to the desired standard. Even here, however, external evidence may be relevant as a test of plausibility or perhaps even of accuracy of components. One test of the quality of the whole estimating effort is the extent to which external evidence is sought and adduced to test plausibility and accuracy. Robustness. The estimates should be relatively insensitive to refinements in concept and methodology or improvements in data collection. 0 SECRET 11 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 5EGRET With respect to the first criterion, the panel was concerned primarily with documentation; we have not attempted. to manipulate the estimating system in order to test replicability. We will discuss the other six criteria in varying depth, paying particular attention to the valuation concepts and their implementation. Thus, the panel has not attempted to "audit" the estimates, and even within the coverage limitation discussed above, this report cannot pretend to represent a complete evaluation of the estimates. Nevertheless, we believe we have reviewed the system in sufficient detail to express supportable judgments regarding major aspects of its quality. D. Contents of the Report Part II discusses the costing concepts and the procedures for applying them in practice, beginning with the general rationale for such value aggregates and then continuing on to examine the ruble and dollar estimates in some detail. In relation to the criteria outlined above, the assessment concentrates on conceptual appropriateness and fidelity of implementation. The other criteria are dealt with in Part III. Part IV considers the management of the estimating effort, and the report concludes with a set of recommendations in Part V. 0 0 SECRET 12 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 0 II. CONCEPTS AND METHODOLOGIES A. General Analytical Rationale The fundamental rationale for producing these estimates is that for various purposes one needs an aggregate--a single number that answers the question, "how large is the Soviet military effort?" This is true whether the concern is Soviet trends over time, comparison with the U.S effort, or comparisons with other Soviet aggregates such as GNP. For many purposes it may be more useful to look at disaggregated measures in physical units, but at some level of analysis policymakers instinctively ask for an aggregate. It usually turns out that prices are the most useful way to combine incommensurable physical quantities. Only in this way is it possible to bring together the various aspects of the U.S.-Soviet comparison, and the divergent trends for various elements in the Soviet program. Moreover, inasmuch as CIA devotes large resources to estimating force levels, assessing technologies and designs, and estimating output of military hardware, it is extremely valuable to have the aggregate costing effort as a framework to guide and discipline this work for completeness, quality, and consistency. The search for broad perspectives on the size of the Soviet military program arises primarily in two analytical contexts. One is concern with the size of the Soviet effort in relation to that of the United States in various breakdowns. For this purpose the Agency's effort focuses on dollar valuation. This provides figures that U.S. policymakers can intuitively understand and react to. Moreover, this is an appropriate basis for valuation, since the dollar price system represents one of the two theoretically relevant sets of trade-off relationships that can be used to assess comparative resource inputs of the two countries. The other set is rubles, but for reasons indicated later, ruble size comparisons have not received equal prominence. The second use of the monetary value or cost of Soviet military activities is to aid in assessing the burden of defense on Soviet society. There is a presumption that in the context of other information regarding Soviet policies, a burden measure can tell us something about Soviet priorities and intentions, limits on Soviet military expenditures, and on possible Soviet reactions to arms control overtures or changes in U.S. military posture. Since the concern is the burden as Soviet decisionmakers might perceive it, it is appropriate for this purpose to aggregate quantities with ruble price and cost weights. Two corollary concerns of interest to U.S. policymakers can le also be dealt with only by value aggregates of varying degrees of comprehensiveness. One concern relates to the structure of SECRET 13 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 SECRET Soviet military allocations (by mission, region, resource category, etc.) and changes in structure over time. The other is the need to gauge the growth of the Soviet military effort: is the burden changing, is the USSR catching up, falling behind, or moving ahead in comparative level of effort? One can approach this last set of questions by calculating the burden or comparative size at successive points in time, but growth rate comparisons are often a helpful way of examining the issue. One of the most serious confusions in using the CIA estimates is a temptation to interpret them in terms of capabilities-- Soviet relative to the U.S., or changes in Soviet capabilities over time. These estimates are not intended to and cannot support such interpretations. The numbers measure the flow of resources allocated to the military end-use each year. That flow includes both current inputs, such as personnel services and outlays on operations and maintenance, which are used up within the year, and capital inputs, such as construction and procurement of hardware. Capabilities at a given time are a function of the flow of services from the stock of military capital (which includes equipment acquired at various points in the past) plus the flow of current inputs. Thus, the growth of the allocations of inputs to the military end-use is not a. measure of the growth of capabilities, nor is the relative size of Soviet and American expenditures in a given period a measure of relative capabilities at that time. Comparison of cumulated flows of investment elements of military expenditure over extended periods of time are only a crude approximation to measures of relative capability. It is sometimes suggested that the Agency's aggregate measures of Soviet military effort would be more useful if they were designed not to measure input flows, but to measure military potential or capabilities. Unfortunately, there seems to be no satisfactory way to use prices to aggregate across all the kinds of forces being measured to arrive at totals that can stand interpretation as measures of capability. Four main reasons block progress on this score: the dependence of capabilities on the scenarios envisaged for the use of force and on military intangibles; non-optimal defense procurement decisions; the problem of depreciation and obsolescence; and the practical difficulty of developing a set of physical quantities for stocks on the U.S. side, structured comparably with those of the USSR. Military forces have important political uses in peacetime, but they are raised and maintained primarily for possible employment in war. The outcome of battle is, however, not a simple function of ability to apply physical force, of what might d the "force potential" of weapons and soldiers. It ll e be ca depends also on the context in which war takes place--for example, conditions of terrain and weather, number and types of SECRET 14 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 SECRET ? allies on either side, and so forth. It also depends on a variety of intangible and probably inherently unquantifiable elements, such as leadership and morale. Even if we abstract from context dependence or the role of intangibles and confine the meaning of capability just to force potential, there are still other difficulties. At the time of acquisition, any given piece of U.S. equipment is presumably subjected to the test of whether its contribution to U.S. military capabilities matches the cost of alternatives forgone, so that dollar values may putatively measure capability at the time. Many observers would dispute the validity of that interpretation, in view of the bureaucratic and political forces distorting the efficient allocation of military budgets in the United States or in other societies. Whatever position one takes on that issue, changes over time in the contribution of military equipment to military potential take place in complicated ways (simple wear and tear, obsolescence because of replacement on one's own side or technical advance on the other side, maintenance or enhancement of capability through repair and modernization), so that it is difficult to find acceptable ways of adjusting acquisition values to reflect changes in capability. Analysts do try to aggregate various kinds of forces using non-economic measures of military worth, such as firepower, and seek comparative evaluation of forces in scenario-specific situations. We encountered some experiments with aggregating stocks by prices, especially an effort to develop relative U.S.- Soviet stock values for naval surface combatants. None of these efforts, price-based or using other common denominators, involves aggregates of the scope attempted in the CIA estimates of military spending. As for the fourth problem, estimating U.S. stocks in physical units, the task will probably have to be undertaken 'by other agencies; it seems outside CIA's mandate. An important implication of the fact that the dollar totals are not intended to be used as measures of capability is that it is unnecessary, indeed inappropriate, when estimating the dollar cost of some Soviet unit to try to take account of performance differences. The same applies in figuring ruble values for U.S. equipment. The point is discussed further in section II B below. I To sum up, the Agency effort is clearly and advisedly conceptualized as intended to measure the cost of the resources the USSR allocates to military uses each year, either in rubles or in terms of what it would cost the United States to acquire the same amounts of the various inputs to military capability. It is the consistent application of this definition that gives the estimates their integrity, but this integrity is maintained only as long as the estimates are not loaded with other SECRET 15 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 SECRET ? r interpretations. Making sure that users understand the questions the estimates can be used to address, as well as the questions they cannot answer, is a major and increasingly important task in presenting them, orally or in published form. B. Dollar Costing Concepts and Methodologies The first ttep in estimating the cost of Soviet military expenditures in either dollars or in rubles is to establish quantities--physical amounts of the resources allocated each year to military use, such as number of men, new facilities constructed, the number of ships newly commissioned, etc. The accuracy of those numbers is obviously an important determinant of the quality of the estimates. As noted, the panel did not attempt to review the methodology for estimating the underlying quantities, though a few evaluative comments will be made in Part III. Here we are concerned with the derivation of the dollar unit costs by which these quantities will be multiplied in the aggregation process. 1.Conceptualization of Cost A central question motivating this review is whether the estimates are in fact conceived and implemented in a way that makes them suitable for the purposes described earlier. We find that the process of producing the dollar figures is guided by a well thought out conceptual criterion. A commonsense starting point would be the question, "how much would it cost the United States to buy the resources the Soviet leaders allocate each year to the military end use?" Simple as this sounds, it is in fact ambiguous because it leaves unclear at what point in the process of turning economic resources into military forces the flow is measured. One might for example, calculate the dollar cost of Soviet hardware procurements by asking what it would cost in the United States to hire the number of people that work in the Soviet defense plants producing the hardware, to buy the materials used in those plants, and so on. Alternatively, this resource flow could be measured much farther downstream, by asking what it would cost in the United States, using U.S. equipment design philosophies, manning approaches, repair practices, etc., to field a force matching the Soviet in capability. The first approach would generate a much larger dollar total than the second, since the former.would not allow for higher U.S. productivity in producing military hardware, nor permit any latitude for resource-saving improvements on Soviet choices at any stage of the process--design of equipment, or technical and organizational choices for combining diverse elements into a given capability. The Agency's analysis of Soviet weapon design, organization and production practices suggests that there are, indeed, large system inefficiencies of SECRET 16 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 SECRET 0 this kind. In our view, the Agency analysts follow a clear rationale for choosing among alternative concepts of dollar cost, and generally succeed in getting consistent execution of that rationale. Their rule is to measure the flow at the point where goods and services are acquired by the military forces. That is, they measure how much it would cost in the United States to buy (at prices consistent with U.S. institutional arrangements, profit patterns, and the like) the goods and services the Soviet military establishment receives each year to maintain and expand the USSR's military forces. They seek uniformity in practice by figuring the dollar cost to acquire or support the "units" defined in the Agency's basic military-economic accounting framework, the Strategic Cost Analysis Model (SCAM), i.e. such things as an item of equipment, a military formation, or the annual 0&M support for a piece of equipment or a military formation. The approach used can be clarified in terms of some possible alternatives for costing an item of procurement--a set of concepts that has come to be called the X, Y, and Z costing models--whose features are summarized in the following tabulation. These models may be contrasted with an analogue approach. ? SECRET 17 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 SECRET ? Model X Y Z Technology us US Sov on Production History Design US Sov Sov and Capacity Sov Sov Sov The X, Y and Z approaches approach require a reasonably full technical description of the item (which may come from actual possession of the piece of equipment or from technical intelligence), on the basis of which a contractor, usually a U.S. manufacturer of the corresponding kind of equipment, estimates the cost to produce it in the United States. The analogue approach is to find the closest possible U.S. counterpart of the Soviet item in terms of performance, and to assign the Soviet item the cost of the U.S. analogue. The analogue method was used extensively in earlier years, but it has been virtually completely dropped today. The X, Y and Z alternatives are defined in terms of different combinations of assumptions about design and manufacturing technology employed. All three approaches assume that the required production capacity and experience are available in the United States, and (where this is relevant) that location on the learning curve is defined by Soviet production history. The X model calls for estimating the cost of providing a unit similar to the Soviet unit, but allowing changes in design features and production techniques to conform to the practice of U.S. producers. In this conception, if the Soviet unit being costed were a piece of equipment employing tube rather than solid-state electronics, the cost would be estimated for producing a similar piece of equipment but designed with the solid state electronics that would be used in the United States to perform roughly the same function. The estimated cost for producing this design assumes the use of U.S. manufacturing methods and materials. In the Y model the cost estimator accepts the physical design features of the Soviet equipment, but estimates the cost of producing that design using U.S. manufacturing technology and materials. If a Soviet ship lacks the damage control systems characteristic of U.S. ships of comparable types, or provides less room per person for its crew, those features of the Soviet design are accepted in figuring what it would cost a U.S. producer to produce such a ship. ? The Z approach calls for the costs of providing the unit, SECRET 18 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 SECRET using not only the Soviet design but also Soviet materials and manufacturing techniques. To see what this means, consider the way an aircraft would be costed under each of these models. Under the X model, the contractor estimating the production cost in the United States would be asked to characterize the aircraft in terms of such attributes as weight, speed, and range, and would use a cost- estimating relationship (CER) based on U.S. experience to estimate the cost of producing a plane with such characteristics. In the Y model, the Soviet equipment would be much more fully described in physical terms, and the contractor would be asked to estimate the cost of producing a plane of that design. The Z model would follow the concept, "what would it cost in the United States to replicate Soviet acquisition of the plane," even more literally in requiring that the U.S. manufacturer assume he were using Soviet materials and production methods. With the important and unfortunate exception of RDT&E, the Agency analysts properly adhere to the Y concept throughout. The X model is a mixed performance and resource cost criterion, and therefore ambiguous in its interpretation. The Z model is. conceptually extreme in demanding U.S. replication of Soviet factor allocation patterns, material use and manufacturing technologies. U.S. contractors would not have detailed knowledge of these matters, which would be expensive to develop. There remains sone ambiguity in the Y model as to what is meant by accepting the Soviet "design" in all the different contexts in which the issue arises. In the case of equipment, for example, there is a hierarchical structure relating physical attributes of a piece of equipment to its performance, and we can specify "design" in terms of variables at various levels of'that hierarchy. Imagine a Soviet piece of equipment in which a given degree of reliability is achieved by redundancy, where the American manufacturer would produce the same result by using higher quality components. We can tell the cost estimator to treat the actual physical layout as the "design" he is to reproduce, or alternatively to take the specified degree of reliability as the "design" feature he is to match. There is an inherent ambiguity here as to what is meant by "design." The higher the level at which design is specified, the more it appears as if trying to value the Soviet equipment in terms of its capability rather than its cost. In our view, any such contamination of the cost concept with capability overtones is of little quantitative importance, since it is confined within the "units" of SCAM. Given that there are some 1300 of these in the model, they tend to be at a low level of aggregation. ? Though we have illustrated these concepts with equipment SECRET 19 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 JLI.KL I is examples, the Y concept of accepting Soviet design is followed in other contexts as well. In the case of repair, for example, the Soviet proclivity for buying more overhauls of a piece of equipment than U.S. forces do is taken as given, and the question is, how much would it cost to buy the number of spares and to do the number of major overhauls over the service life of the given piece of equipment that Soviet practice calls for? As an important exception to the general approach outlined above, RDT&E is estimated as the dollar cost of Soviet outlays on these activities, rather than as the cost of replicating in the United States the RDT&E achievements produced for the military, such as developing a given communications satellite, or achieving a specified gain in missile accuracy. More will be said on this component of the estimates in Section II D below. 2. Implementation of Dollar-Costing in Practice How well is this concept realized in practice? Is CIA in fact able to develop dollar costs that fit this concept for the various resource components of total military expenditure (procurement, operations and maintenance, personnel, etc)? How in fact does CIA get dollar prices? The best way to evaluate this is to discuss practice for each account of the estimates: ? Personnel. The largest component in the dollar total for Soviet m liitary expenditures is pay and allowances of personnel, which accounted for over 30 percent of the total in 1981. This is one of the most meticulously estimated parts of the whole system, and is supported by a separate manpower model feeding into SCAM. A major feature of the methodology is the application of U.S. pay rates and allowances not to the Soviet rank structure but to the Soviet job structure, since the Soviets use a different set of rank-job assignments, often requiring officers for functions where the United States would use NCO's, for example. The Agency manpower model takes each person in the Soviet armed forces, specifies the kind of job he does, and assigns to him the U.S. rank that would be used to do that job. U.S. pay and allowances for the U.S. rank are then taken as the personnel cost of each serviceman. This might be considered a slight departure from the Y model, since the personnel costing specifies Soviet "design" in terms of jobs, rather than accepting the literal rank structure of the Soviet forces. On the other hand, one can argue that the rank structure should be thought of as an aspect of "production technology" rather than "design." The effect of this choice is to reduce the value of Soviet manpower costs relative to a procedure that would attach U.S. pay and allowance scales to the Soviet rank structure. 10 SECRET 20 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 SECRET ? 0 Procurement. Procurement is the second largest component of the dollar tr otaT, accounting in 1981 for about 25 percent. The three most important categories are aircraft, missiles, and ships. Since together they account for about two thirds of the dollar value of procurement, the quality of cost estimation for these items has a powerful impact on the accuracy of the estimates. Land arms account for another 7 percent of the total. For all these categories we believe the estimates are done with the degree of thoroughness, care, checking and guidance needed to ensure trustworthy results. In an earlier period, costs were estimated by analogy with U.S. models of comparable capability or by crude parametric models. During the second half of the seventies, there was a shift to extensive contractor studies for estimating costs of major Soviet procurement items, and a notable growth in the sophistication of the cost estimating models used for all major equipment categories. Procurement is now costed largely on the basis of detailed engineering studies or elaborated, "Sovietized" CERs, which take into acount the specific features of the Soviet model. Moving from simple analogue or parametric estimation to the more sophisticated techniques has often resulted in significant change in unit costs of particular weapons. A dramatic example is provided by the ZSU 23-4 anti-aircraft system. Originally costed on an analogue basis, direct engineering analysis subsequently raised the unit cost 13.4 times. However, most such improvements in costing result in far smaller changes, and not necessarily in one direction. At present, nearly 30 percent of all items are costed by engineering analysis, about 60 percent by "Sovietized" CERs, and only 10 percent by analogy with U.S. equipment. Effective guidance and supervision by the Agency is crucial in determining the quality of these contractor studies. We believe this has been good, but it depends heavily on personal interaction between Agency analysts and contractor. The written guidance and documentation needed to communicate to contractors the precise concept of cost the Agency is seeking to reduce may be weak. Two points regarding the cost estimating procedure merit special mention. One of the most insistent critics of the Agency estimates is Professor Steven Rosefielde, one of whose major claims in published work is that the dollar costs are understated because they are estimated on the basis of a "fixed-vintage" model, with inadequate allowance made for quality improvements between generations of equipment. In fact the CERs used in the Agency estimates take explicit account of intervintage changes in design complexity and the resulting effects on costs, and Professor Rosefielde's published criticism is based on an SECRET 21 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 SECRET 0 inadequate understanding of the methodology followed. We are not able to judge the thoroughness with which technical change is allowed for in practice. Along with some other critics, Professor Rosefielde has also disputed the way "learning" is handled in the estimation of dollar costs. The issue concerns the meaning and construction of "constant" prices. For many kinds of equipment, especially aircraft, Soviet production runs are very long, and presumed cost reduction by learning important. Hence satisfying the criterion of "what it would cost in the United States" to acquire the amounts of these aircraft the Soviets procure should take learning into account. It is the panel's view that it is appropriate to consider the "constant" procurement cost of a weapon subject to learning (whether in rubles or in dollars) not as a single value but as a schedule of costs in the base year that would have prevailed had the scale of output expanded accordingly during that year. The effect of taking account of learning is to reduce the level of costs (although not necessarily their rate of growth), relative to an approach that ignored learning. However, this is to be expected and seems clearly justified. In estimating the U.S. cost of aircraft acquired in a given year, their position in the Soviet production sequence is used to locate them appropriately on U.S. learning curves. This is the proper approach, since the question concerns how much those aircraft would cost in the United States if produced at Soviet output scales. Learning is taken account of in a more subtle way than might at first appear, since it is applied at the level of the SCAM unit, rather than at the level of the complete weapon system. For example, aircraft engines are tracked separately from airframes in SCAM, allowing for the learning effect 'on aircraft cost separately for each. For a missile produced in large numbers and used in several missions, the benefits of long runs can be allowed for in each of the situations in which it is used. Ships are another item for which learning is significant, but here the only distinction made is between the high cost of the lead ship of a given design, and the lower, uniform, cost of subsequent ships in the series. 0 erations and Maintenance. This category accounted for 23 percent of total expenditure in 1981. The basic approach here is the use of O&M "factors" tied to quantities in the SCAM model. In a simple example, say, the maintenance of a building, annual expenditures on maintenance would be expressed as a fraction of the acquisition cost. For aircraft, repair cost is figured as a ratio of lifetime repair outlays to the original cost of the aircraft, and the resulting value is allocated over time in SECRET 22 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 SECRET 0 0 accordance with Soviet practice. These estimates are basically made first in rubles and then translated into dollars with the aid of ruble-dollar ratios. Construction. This is a fairly small item (about 4 percent of the dollar total in the early eighties). It is estimated first in rubles and then converted to dollars by use of ruble- dollar ratios. Issues in estimating the original ruble amount are discussed in Section II C. Research and Development. This is the least satisfactory of any of the components. Our criticisms refer to it as a part both of the dollar estimate and the ruble estimate, and it will be easier to discuss it separately in Section II D below. . Price Adjustments. The dollar costs initially estimated for any element of the estimates carry a particular date: e.g., the cost of a given tactical aircraft generated by an in-house CER or, perhaps, estimated by a contractor, will be figured in prices of a particular year. Each such cost must eventually be expressed in the price level of the year serving as the weights for the annual updates. Thus, the tactical aircraft cost may have been calculated with reference to 1975 and must be expressed in, say, 1981 dollars for the 1982 update. For this purpose, CIA employs a large number of standard U.S. price indexes at a fairly disaggregated level, combined in a variety of weighting patterns to produce indexes appropriate to the various components. We did not review this part of the estimating procedure in detail, since the component price indexes used are not estimated independently by the CIA, and since it seems to be a reasonably straightforward task to manipulate them appropriately. C. Ruble Costing Estimates of Soviet military expenditure in 1970, the base year of the CIA's constant price ruble series, may be viewed as approximating an aggregate on the books of Soviet financial authorities. But as the entries in the CIA series move away from the base year, before or after, the ruble estimate must be seen as a construct rather than as an attempt to replicate an actual figure recorded in Soviet official accounts. This is so not just because the estimate is expressed in constant 1970 rubles rather than in current prices, but also because its scope is defined by the CIA concept of what should be included. Actually two totals of appreciably different scope are estimated. The first derives from the purpose of comparison with U.S. expenditures and accordingly reflects the DOD definition of defense activities. The second concept is broader and was developed as an attempt to approximate in coverage what the Soviet decision makers might see as defense outlays. Some questions on this issue are raised in SECRET 23 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 SECRET 0 Section II E below. The ruble total adds together components estimated in a variety of ways. Some are estimated directly in rubles, others are calculated by converting components originally costed in dollars to rubles by using appropriate ruble-dollar ratios. The best way to explain how this is done and to present our evaluation of the process is to review the accounts individually. Research and Development. Soviet expenditures for RDT&E are first estimated directly in rubles. The panel considers the underlying methodology and the resulting estimate unsatisfactory, for reasons explained in Section II D. Personnel. Personnel cost in rubles is derived from very detailed estimates of the number of military personnel (by ranks) and civilian employees of the Ministry of Defense, multiplied by rates of pay and allowances, adding the cost of clothing, food, and utilities. The total is adjusted upward by roughly estimated costs of pre-induction military training programs at various educational institutions. The estimate is well grounded in detailed ruble cost information and is supported by the elaborate, subsidiary (to SCAM) manpower model mentioned earlier. Construction. First direct costed in rubles, construction is a fairy small item (only about 3 percent of the ruble total in the early eighties). Until recently it was done somewhat crudely. The biggest problem with construction in a building block approach is the difficulty of covering construction comprehensively by observation. Work in early years concentrated on getting the best possible estimates for such expensive and easily visible items as airfields and silos. In 198'0, a careful review was carried out in an effort to get systematic coverage of the less easily observed forms of construction. The chief innovation involved intensive imagery-based study of the components and the time pattern of development of the capital infrastructure in a sample of typical military units, with extension of the fully developed patterns to all corresponding units. The ruble cost factors are based on extensive Soviet information on cost estimating norms for various components and types of construction, regional and climatic adjustments, and cost overruns that are well substantiated in Soviet source material. As a consequence of successive revision of the construction estimate through the 1970s, the level of the series was raised several fold. Operations and Maintenance. Estimates of ruble costs of 0&M are based on norms for such expenditures related to ruble values of weapons and other equipment stocks reflecting actual Soviet SECRET 24 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 SECRET 0 0 0 practices. Specific rates for maintenance and repair, expressed as percentages of procurement prices, are derived from civilian analogs (based on a special study of aircraft and ship maintenance and repair), and are applied to the estimated value of the stock of equipment on hand. Other costs, such as POL, are calculated on the basis of the stocks of equipment and estimated rates of use, as well as extensive ruble price information. Procurement. This is the largest resource category in the ruble estimate, acccounting for nearly half the total in the early 1980s. Given the paucity and ambiguity of the ruble price information available for this large, heterogeneous category, it is also the one posing the most difficult challenges to cost estimation in rubles. Costs for some procurement items are estimated directly in rubles. The costs of major surface combatants (excluding electronics and armaments) are derived from a Soviet merchant- ship cost-estimating model relating to the early 1970s. The model was developed on the basis of ships smaller than most major surface combatants. But it is sufficiently complex to permit taking into account most of the developments in basic ship structure that have resulted from vintage change. It should be emphasized that ship electronics and armaments are costed separately. Another portion is estimated esentially by multiplying quantities of equipment procured by actual ruble prices. The major items treated in this way are aircraft and tanks. At present CIA has a significant number (approximately 100) of ruble prices, encompassing most of the important components of procurement. Unfortunately, these are rather heterogeneous with respect to date and definition and they must be processed extensively to make them suitable for use as "constant 1970" prices, either for direct costing or for forming ruble-dollar ratios. The first step in using these prices is to define their meaning in several dimensions. It is necessary to specify the year to which they probably refer; whether the weapon is subject to learning; at what point on the learning curve the particular price emerged; and so on. Some judgments must also be made as to the reliability of the source. The next step is to define a best estimate of the "1970 constant price" for the item, a process in which a statistical procedure is used to minimize the bias involved in the uncertainties attaching to each element of the price identification. Ideally, prices for years later than 1970 should be adjusted for price level change. In the absence of reliable price indexes however, possible inflationary change since 1970 simply becomes an additional element of uncertainty in the bias- minimizing process. The resulting "constant 1970" prices are SECRET 25 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 SECRET ? used to value those procurement items with which they are associated, for inclusion in the ruble procurement total. For the remaining procurement items, ruble values are obtained by converting the dollar cost estimates of the corresponding categories (originally estimated as Soviet quantities times estimated dollar unit costs) to rubles by means of average ruble-dollar ratios. These synthesized ruble-dollar ratios are created by aggregating the known ruble-dollar ratios in a given product group, derived from division of a known ruble price by its dollar cost counterpart, using a weighting procedure that minimizes the variance in uncertainty. In brief outline, this is the basic procedure for estimating procurement in rubles. In evaluating the resulting total, the major issues on which one should focus are: the validity of the ship costing model; the reliability of the set of available ruble prices (used directly in costing and indirectly in constructing the average ruble-dollar ratios); the appropriateness of the methods used to process this price information into individual ruble-dollar ratios and for aggregating these ratios to construct group averages. The panel is persuaded that: a) While the ship model dates from the early 1970s, it is apparently sufficiently detailed to encompass vintage changes. However, the model is best suited for ships that are somewhat smaller than the surface combatants to which it is applied. It would seem desirable to update the model at an early opportunity; b) There is enough ruble price information available to validate what is done for the remainder of the account and to generate acceptably close results; c) SOVA analysts have exercised care in screening the price information to be reasonably sure they know what they have; d) the statistical techniques used for minimizing the bias introduced by uncertainty in the price information represent a methodologically sophisticated and intelligent approach. However, there are some uncertainties concerning the 1970 ruble prices and ruble-dollar ratios and a number of steps could be taken to strengthen the reliability of the estimate: 1. There is need for further analysis of various economic parameters entering into price setting in Soviet defense industries, with particular emphasis on those, such as capital- output ratios, that affect profit levels. It would also be useful to select several Soviet weapons for which reliable prices and other relevant data (length of the production runs, level of subcontracting, etc.) are available and test the "reasonableness" of these prices by estimating current costs of production using input-output data. Such studies have not been undertaken before SECRET 26 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B00420R000701450001-4 and their potential utility is considerable, not only for dollar- to-ruble conversion but as a basis for the factor cost adjustments introduced in the calculation of the defense burden, which at the present time, are rather rough. 2. We do not know enough about cost accounting and price- setting rules in Soviet defense industry and this introduces an element of uncertainty in cases where the ruble price of a Soviet weapon is estimated by applying an average ruble-dollar ratio to the estimated U.S. dollar price. As a rule, profitability rates (ratio of profits to capital or profits to cost) differ significantly among Soviet industries and even among products within the same industry or plant. By using an average ruble- dollar ratio based on a sample of Soviet prices, the methodology creates a ruble price with an averaged profitability ratio which may or may not correctly reflect the profitability norm set for the weapon by Soviet planners. This is an element that might well be considered in setting subjective uncertainty limits on the raw ruble prices. 3. Although there is a considerable volume of Soviet foreign trade prices for both military and general purpose machinery, these have so far not been used to develop procurement ruble prices and ruble-dollar ratios. SOVA argues that Moscow often heavily discounts the prices of weapons and equipment exports to meet foreign competition, and that the sample of available foreign trade prices is both small and lacking in definitional information. Nevertheless the panel believes there may be room for plausibility testing of ruble prices and ruble-dollar ratios on the basis of information on arms exports. Ruble-dollar ratios calculated from this information might even provide alternatives to ratios being currently used by SOYA. Ruble-dollar ratios can be computed for identifiable weapons and general purpose machinery for which we have domestic ruble prices and foreign currency prices at which these items were either sold or purchased abroad. In any event, there is a considerable discrepancy between some producers durables ratios estimated by CIA (published in 1980) and ratios estimated using Soviet export data. For example the unweighted CIA ruble-dollar ratio for 9 Soviet trucks was 0.37 rubles per dollar but a ratio of 1.27 rubles per dollar can be computed using the price at which these trucks were sold abroad. In the latter set of ratios we know that the prices are those of identical products. Similar discrepancies can be cited for tractors and construction machinery. The spread between the two sets of ruble-dollar ratios is alarming and strongly suggests the need for more comprehensive work on machinery prices. 0 SECRET 27 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 SECRET Is 0 U. RDT&E In the 1981 estimate RDT&E accounted for 17 percent of the dollar total and almost a quarter of the ruble total. It is also the fastest increasing component in the Agency's estimate of total military expenditures, growing at about 8 percent in the 1970s and since 1980 at something over 6 percent per year. Between 1976 and 1981 nearly half the increment in the Agency's estimate of total military expenditures in rubles is accounted for by R and D (4.9 out of 11.2 billion rubles). The credibility of the overall series thus depends in an important way on the credibility of the R and D series. In the view of the panel, there is very little foundation for the estimates of R and D, either in rubles or in dollars, and we consider R and D the component of the estimates most needing attention. Military R and D is estimated first in rubles. Originally the starting point was the official series on total science expenditures. Since this was thought to be incomplete in coverage, a new methodology introduced for the 1979 update estimated total R and 0 on the basis of manpower numbers, the average wage in R and D and the share of wages in total R and D expenditure. This comprehensive total was then split between civilian and military on the basis of a few vague statements in Soviet sources interpreted to refer to the share of military in total R and D. In our view, none of the underlying Soviet statements really says what is attributed to them. The correction of this current price series to a series in 1970 prices was done in a manner that seems to us incomplete and unsatisfactory. The method used in the last several years is even cruder. Applying the original approach in the 1970s generated a series showing growth at about 8 percent. The Agency analysts thought that was reasonable on the basis of what they knew about the expansion of facilities, the growth of major programs, and other evidence. In the latter part of the seventies, however, it was thought that this approach was producing an unrealistically high growth rate, and since 1980 the estimate of R and D expenditure produced by the methodology described has been scaled down to a little over 6 percent on the basis of what can be observed about the growth of facilities known to be devoted to military R and D. In our view, there is very little evidential basis for any of these procedures. The statement about how much the official "science" series understates all R and D is very vague and no serious work has been done on how this relates to the difference between U.S. and Soviet definitions of what is in R and D. The estimated share of military in total R and D is based on a similarly vague Soviet statement concerning what fraction of R and D is used to raise productivity in the economy, and there is SECRRET 2 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 is no indication in the source of what the author means by that, or what total his figure refers to. The few additional benchmarks used to check the current estimate are all equally undefined. The evidence on which SOVA relies as to the share of wages versus other inputs in the total is not necessarily applicable to he coverage of the military manpower figures with which the 1979- update methodology starts. The panel does not have alternative evidence to offer on what these figures should be, but the support for the current numbers is extremely weak, and the Agency has not fully explored the range of evidence available. For the estimates in dollars, rubles are converted with the aid of an aggregate ruble-dollar ratio, which originated in the mid-seventies by weighting ratios for separate components of the total, specifically labor and nonlabor. For nonlabor, a general ruble-dollar ratio thought to represent relative costs in manufacturing generally was used; documentation for the labor ratio is no longer reproducible. The implicit overall aggregate that emerges, .46 1970 rubles per 1980 dollar, seems high. As a kind of calibration, in the work done by one of the panel members for the NSF, the ruble- dollar ratio for total R and D that emerged was about .20 rubles per dollar, less than half that used in the Agency estimates. ? The main reason for the difference is that the Agency estimate attributes a large share of total R and D expenditure to industrial production-type activities, and the NSF study may well have underestimated that share. The effect of using a ruble- dollar ratio lower than the one now used would be to make the CIA's dollar series even higher than it is now. On the other hand, the dollar value of Soviet R&D seems implausible. At 37.6 billion dollars in 1981, it is twice the U.S. value of 17.9 billion dollars. The Soviet-U.S. expenditure ratio seems improbably large for a comparison parallel with those in the other accounts, namely, how much technological advance is being delivered to the military. We would expect the RDT&E comparison to be exaggerated on methodological grounds in any case, since it is handled differently from the other resource categories: Inputs to the production of knowledge and prototype systems are being measured rather than the outputs of this "production" delivered to the military. Thuse RDT&E estimate does not take into account what many would assume to be very low productivity on the Soviet side. The Agency analysts themselves are far from pleased with the estimate and with the underlying methodology, and in the last several years some work has been done on alternatives to replace it. One new approach would start from an inventory of known major R and D facilities, developed and tracked in part through SECRET 29 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 att,KC I 0 imagery, and then on the basis of manning factors produce an estimate for the labor force. Multiplication by an appropriate set of wage rates would generate a wage bill, and this would be scaled up to a total expenditure figure for the known facilities from evidence about the ratio of wage bills to total expenditure in various kinds of facilities. Work on this methodology has proceeded very slowly, because of the lack of enough analysts to allocate to it, and it seems unlikely that much will be done soon to put it into operation. Still another new methodology is under development. A contractor study has been underway for several years to determine whether it would be possible to estimate dollar costs of the R and D programs that would be required in the United States to create particular weapons systems or particular technical advances that have been identified in Soviet defense production programs. If this approach succeeds, one of its advantages would be the provision of estimates conceptually consistent with the rest of the cost estimating methodology because it would generate the dollar cost of what the Soviet military is getting--i.e. the development of some system. Progress on this methodology will probably be slow and it will be difficult to make it operational, in the costing effort, since it can cover only R and D of major systems. The sum of these major system R&D costs would have to be blown up by some large factor (perhaps 100 percent or more) to cover all R and D, and this would require careful calibration with some correctly known total for a recent benchmark date. Since the present series is based on a very different concept, and since we are dubious about its validity even on its own terms, splicing in numbers from this new methodology presents problems. Even when the contractor is finished, then, it will be some time before the new approach can actually be incorporated into the estimating procedure. Our overall conclusion on both ruble and dollar sides is that this part of the CIA estimates is at a distinctly lower professional level than the other major components. The method used may well result in exaggeration of the rate of growth of total Soviet military expenditure and of its size relative to that of the United States. Considering the importance of this estimate, it is the area most urgently in need of improvement. E. The Burden of Defense As indicated earlier, the chief purpose of calculating the ruble cost of Soviet defense activities is to measure the burden of defense on the Soviet economy in the form of the share of total resources allocated to defense. This indicator of defense burden has become one of the most widely misunderstood and heavily criticized products of SOVA's military economic SECRET 30 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Vtv??r ? 0 analyses. The confusion and criticism stem from the very special nature of the measurement and perhaps from the manner in which the results have been communicated inside and outside the government. The defense burden is calculated as a ratio of Soviet defense expenditures to Soviet GNP, with both numerator and denominator expressed in factor-cost adjusted constant 1970 rubles. Factor cost adjustment is a statistical procedure that presumably eliminates some or most distortions in the measurement of cost of resources stemming from the arbitrariness of the Soviet price system. It consists of estimating, removing, and reimputing, as appropriate, taxes, profits, and subsidies in Soviet economic accounts, both civilian and military. There may be inherent shortcomings in these measurements as presently defined and estimated by SOYA. The recomputations and corrections necessary to make both defense expenditures and GNP conform to an adjusted factor cost basis introduce some uncertainty, particularly in the reconputation of profits in the defense industry. Also, the current methodology does not consider the cost of possible direct and indirect subsidies built into 1970 prices of industrial inputs (including possible favorable foreign-to-domestic ruble exchange rates for intermediate and final products in Soviet imports). Apart from this possible estimating error and in its own specific terms, the SOVA measure of defense burden is well defined and well executed. However it has been argued that adjusted factor cost, although an improvement over the Soviet established prices, is still an incomplete measure of the opportunity costs of Soviet military activities. This argument, as it is usually developed, actually consists of two charges against the current estimates of burden: 1. The burden of defense estimates are inadequate in scope because they limit the coverage of "military" outlays to a set of activities that is essentially the counterpart of those usually measured in western defense accounting. But the USSR is a different society and economy in which the boundary between military and civilian activities is drawn differently than in the West. There is a need to develop a much better evaluation of the degree of militarization of the Soviet economy and, the range of military activities not encompassed by standard measures. We return to this subject in Section III B below. 2. The prices used in the current burden estimates to aggregate quantities do not reflect the full costs of the imposition of military priorities borne by the civilian economy. Thus, one should add the opportunity cost of operating distinctly different civilian and military systems of supply and SECRET 31 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 distribution of material inputs and manpower (e.g., the priority given to supplying defense industries with scarce inputs and to allocating better trained university graduates to defense-related productive activities). The Panel recommends that SOVA initiate studies (done "in house" or by outside contractors) to develop a broader concept of the burden of defense on the Soviet economy which would measure the real resource costs that are not captured by present measures. The above discussion relates to a western view of the burden on the economy. As noted, CIA develops a "narrow" and "broad" concept of the ruble value of Soviet military expenditure,with the latter intended to approximate Soviet perceptions of the burden. But there is clearly a need to extend the process further. It is desirable to give much more thought to the kinds of measures of military outlay that Soviet leadership might be looking at. In this connection, we note that an experimental effort several years ago developed measures of expenditure at current and "comparable" prices, the latter a Soviet statistical concept, to juxtapose against the CIA measure. It would be useful to return to that exercise and develop it further, including measures of production of military goods and possibly military production by ministry. In this effort, CIA might seek ways of cooperating with DIA, which has been studying ministry production for some time. The defense-burden ratios estimated by SOVA offer less insight than they might into the Soviet leadership perception of the burden because they are cast in terms of GNP rather than "national income" (net material product), which is the much narrower aggregate that the Soviet statistical system uses to measure the total output of the economy. As measures of burden in the 1980s, the CIA estimates at ruble prices are also handicapped by using the prices of 1970, a year increasingly remote from present concerns. If the price movements for military goods have diverged from those for civilian output, the burden measured in current year costs may also diverge, perhaps increasingly, from the measure in 1970 prices. SOVA recognizes the need to develop measures in a more contemporary set of prices. Programs are being developed to change the valuation basis for the ruble estimate to a 1982 base, 1982 being the year of a major Soviet price reform intended to bring prices into line with costs. Current plans include contracting out for a study of the overall impact of the 1982 price reform and the preparation of price indexes, including rice indexes for general purpose machinery n k p o exploratory wor and weapons. A small team in SOVA is preparing the data base of SECRET 32 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 JLVJ\& I recent ruble prices of military hardware. The work seems to be progressing satisfactorily, but a major commitment of analysts' time will be required in 1984-85 when the pertinent Soviet data will have been collected and the contracted studies completed. SOVA has justified its continued use of 1970 prices by the absence of sufficient information on Soviet prices and costs for the later years of the 1970s. However, considering the volume of individual prices accumulated since the 1970 base year, we wonder whether crude price indexes could not have been developed from this growing sample. We understand that prices for the most recent years are not available in abundance, but a rough measure of price change for several categories of procurement could perhaps be obtained at least for the period through the mid- 1970s. The change to the 1982 price base for estimating military expenditures will require a new set of 1982 national income accounts (Soviet GNP in adjusted factor cost prices) similar to those for 1970. A preliminary estimate of 1982 GNP in 1982 prices is supposed to be started this fall and to be completed in early 1984. The panel notes with regret that the SOVA team concerned with Soviet national income accounts is losing its key ? analyst. Shifting to a new price base will also enble SOVA analysts to deal more effectively with a basic issue of the concept of the 1970 ruble-price measure of Soviet defense. The 1982 update pointed up the possible gap between CIA measures of the ruble value of Soviet defense and the volume of resources actually expended on defense (even at "constant 1970" prices). This is a corollary of the SCAM conceptualization of costs, which measures the flow where goods and services are procured by the military establishment. Especially in relation to hardware procurement, the size of the flow of resources into production at points further upstream in the process may not vary directly with the flow to the military of the resulting output. The post-1976 leveling off of procurement conceivably may have been accompanied by a continued rise in the volume of resources allocated to production of military hardware (even after allowance for inflation), which resources, because of various technical holdups, are not being fully converted into output deliverable to the military. As long as procurement seemed to be growing without interruption and roughly in accord with the growth of thwhich is infrastructure of weapons production, this uncertainty, In the in Agency's may did have not been arise. a divergence inherent l970s, horuble wever, there estimate, half ce last halo of SECRET 33 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 SECRET 0 between the value of procurement at constant prices and the volume of real resources the economy had to devote to obtain that flow of weapons. This distinction must be made clear in SOVA's presentation of the estimates to the policy community. Transfer of the CIA's price base to 1982 should help provide a better feel for the way in which contemporary prices, relative to those of 1970, affect burden calculations. However, only a continuous time series of current-price calculations of defense expenditures would provide an indication of the degree to which Soviet spending on defense was changing at the same or different rates than the constant-price CIA measure. F. Ruble Valuation of U.S. Expenditures Comparisons of economic aggregates such as Soviet and U.S. military expenditures most often generate an "index number effect." If the relative quantities of the items entering into each aggregate and the comparative prices of those items differ between the two countries, the relative size of the two aggregates measured in one set of price may differ from what it is measured in the other set of prices. The existence of this effect, its strength and the direction of difference in the depend on the strength and sign of the correlation measures , ? between price relatives and quantity relatives. It must also be emphasized that neither of the two possible comparisons between the two countries' aggregates is uniquely correct; they are equally legitimate and should be used in tandem. When two economies are so unlike with respect to basic scarcity relationships as are those of the United States and the Soviet Union, the index number effect would be expected to be strong at the level both of GNP and major subaggrega,tes. The literature on U.S.-Soviet comparisons has emphasized the existence of this effect, and practictioners in the field expect it to show up strongly in all aspects of economic comparisons of the two countries. The CIA's dollar comparison, used alone as a measure of how large the Soviet effort is compared to ours, has often been criticized on the grounds that it fails to allow for the index number effect. In response to this criticism, the CIA supplements its primary comparison in dollars with a comparison in which both the Soviet and the U.S. programs are costed in rubles. Because of the difficulty of providing the U.S. quantities and estimating what U.S. items would cost if produced in the USSR, this can be done only imperfectly. It is obviously not possible to employ in reverse the method used in estimating dollar costs of Soviet equipment, i.e. asking Soviet contractors to estimate what it ? would cost to produce items of U.S. equipment in the USSR. SECRET 34 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Jtl.Kt I ? ? Therefore, it is necessary to estimate relative Soviet-U.S. unit values in some other way. Unfortunately U.S. physical quantities for individual items of procurement are not available; CIA must work with U.S. dollar aggregates. The task then is to develop average ruble-dollar ratios applicable to the U.S. product-group values from the relatively few individual ruble-dollar ratios available. Nevertheless, the Agency has found it possible to do a reasonably detailed calculation, and the results suggest that the index number effect is not serious for defense: while the dollar comparison shows the cost of Soviet programs as 145 percent of the U.S. outlays, a ruble comparison narrows the difference only to 125 percent. This result is explained by the fact that both sides tend to procure forces in response to military rather than economic criteria, as illustrated by the finding that man- hardware ratios within particular Soviet missions are similar to those in the U.S. forces. There is one issue with respect to the calculation of procurement that has drawn extensive criticism from an academic scholar. Given available ruble prices for some procurement items and corresponding dollar costs, individual ruble-dollar ratios are established. Averages of ratios are then applied to the dollar values for groups of U.S. expenditures within which the samples of ruble-dollar ratios fall. For example, ruble-dollar ratios for tactical aircraft are averaged, adjusted in a way to be described below, and then applied to U.S. expenditure on tactical aircraft. The resulting estimates of U.S. expenditure in rubles have been criticized by Professor Franklyn Holzman as biased downward by improper weighting. That is, Professor Holzman claims that since ruble-dollar ratios are only applied to aggregates of values, such as tactical aircraft, the calculation is degraded because individual equipment quantities are, in effect, weighted by dollar prices instead of ruble prices, as they should be. He is correct in principle, but CIA attempts to correct for this deficiency. For example, with respect to tactical aircraft, since the U.S. acquisitions include aircraft of a considerably higher technological level than those in the sample, and with a presumably higher ruble-dollar cost ratio than the older types, CIA raises the average ruble-dollar ratio by a judgmental, though significant, amount to take account of the fact that the average is unrepresentative of newer models that the Soviets would presumably find more costly to produce. There is little evidence as to how large that adjustment ought to be, and the judgment is essentially speculative. (See also our discussion of a related issue in Section III D.) SECRET 35 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 JL%.RL 1 0 0 For some other resource categories it seems likely that the index number problem is much less serious, and it is possible to apply average ruble-dollar ratios to the category values, like personnel costs. In converting RDT&E, the average ruble-dollar ratio is adjusted by 20 percent on the grounds that much of U.S. R&D activity is more sophisticated than the Soviet, and could be replicated in the USSR only at a relative cost higher than that of the activities both countries perform. Despite our belief that the index number spread is probably narrow, as CIA contends, work in this area appears to be conducted at a low level of intensity. Little effort has been made to break down the U.S. budget outlay aggregates so that more disaggregated ruble-dollar ratios can be used. Also, the ruble value of U.S. expenditure receives distinctly secondary attention in published CIA analyses. Moreover, the Agency treats the defense index number problem differently than it does that for the other end uses of GNP: Both ruble and dollar-based ratios of other end uses are presented and then averaged, whereas the defense ratios are rarely averaged, and the analysis of comparative defense costs proceeds almost exclusively on the basis of the dollar values. Lack of interest on the part of government customers helps explain but does not really justify the situation. SECRET 36 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B00420R000701450001-4 SL KtI ? III. VALIDITY AND RELIABILITY OF THE ESTIMATES A. The Strategic Cost Analysis Model SCAM consists of two parts. The first is a data base developed according to a carefully designed set concepts. The data include information on the physical quanies the arfly as various items used in theasSoviet stockslfromrwhichcflows can be annual flows, and partly past and future, the derived. Covering a total of thirty years, data base includes the costdbelerr ingnisedcfore peach item, such ruble tprices here is a large set of price indexes for parameters. Finally, adjusting prices and price ratios from their heterogeneous original dates to the common-year price basis used in the various estimates. The second part of the model is a programming componentnfor a manipulating eS this produced in generate as total subaggre9at produced categories. expenditures for resource dollars, and i n l and and in individual programming dumissions ins simple routines for checking consistency t con a component also con of various kinds of information in the data base. for SCAM supplemented with several auxiliary programs SCAis ? feeding the SCAM data base proper with information coming from the analysts working on various accounts, such as manpower and construction. The programming component ofSCAM currently h as serious deficiencies. It is an inflexible ysc ent processing rather than permitting on-slianebilnatekraoctivsyestem that relationship with analysts; cannot accept modifications. Soabyrprogramming,tandtmustabe recordkeeping process are not covered handled outside the model. Examples res are ff oreign trademits, and calculations of uncertainty measures of the recordkeeping on items withdrawn from invento . rn stored in documentation of sources and estimating P reseno system the the model itself. fficientldetailttoumakehit possPble to is documented in SU continue to operate if arealimitedleandrinvolvenmostly personnel. The checking routines in series, and such mechanical tasks as finding sharp checks within making some microconsistency the model (for example, directing attention to a series that remained constant or grew at aantndaaelfor sosefnumber of ,years) have to be done by inspection, consistency with outside data are the responsibility of the SECRET 37 Approved For Release 2009/10/06: CIA-RDP86B00420R000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 SECRET 0 individual analyst. The model does not now contain programs to support experimentation with stock values, life cycle costs, or variations in learning curve parameters. These deficiencies are more an inconvenience than a direct interference with the reliability and accuracy of the estimates, but improvements in the model would make the estimating process more flexible and efficient, and would help ensure timely updating and revision of the estimates. The power to do a great deal more consistency checking would be important in ensuring that errors did not creep in unnoticed. There are some capabilities in the present system that have not been fully exploited (such as the use of regional identifiers), but in general it has reached the limits of its capabilities and needs to be remodeled. The accounts branch is now working with a contractor to develop a follow-on model that will eliminate most of these difficulties. The panel believes that it important that this work go forward. B. Comprehensiveness of the Estimates One of the primary shortcomings of any building block method of estimating an aggregate is the always present possibility of missing some elements. Unfortunately, because of the deficiencies of Soviet data, the Agency was not successful in developing an acceptably accurate methodology for estimating total Soviet defense spending independently of the building block method. The SOVA staff, however, is alert to the need to ensure the maximum possible coverage of all main resource category components. Completeness of coverage in all but RDT&E is sought through continuously updated order-of-battle of the Soviet armed forces, enumeration of quantities of major systems with the aid of all-source intelligence, and application of norms or analogues for less observable but also less important elements. The only improvement in this regard we can suggest is developing a more rigorous methodology of tying together production, changes in inventories, losses, and exports of all major weapons. To test the plausibility or the accuracy of values derived by the building block method, it would be highly desirable to have independently estimated ruble values of Soviet defense expenditures or of the major components, such as procurement or personnel cost. A number of possible approaches and methodologies based on published Soviet statistics have been developed in the past by the Agency, other groups in the intelligence community, and by academic researchers, but so far with little, success. Briefly, these approaches can be grouped as follows: ? 1. Total defense expenditures are estimated on the basis of SECRET 38 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 s various unexplained and unidentified residuals in the Soviet state budget, combined with the published "defense" budget and a share of expenditures on "science." 2. Total defense expenditures are estimated as the residual in net material product, the Soviet measure of "national income," after all identifiable non-defense expenditures have been removed. 3. Value of procurement of military hardware is estimated as the residual in the gross value of the output of machinebuilding and metalworking (MBMW) after all non-defense final and intermediate uses have been estimated and removed. 4. Value of procurement of military hardware placed in stockpiles is estimated as the residual in net investment in Soviet net material product after all non-military investment has been estimated and removed. 5. Value of procurement (output) of military hardware is estimated on the basis of plan fulfillment reports by various non-military ministries and estimated total output of MBMW. 6. Value of exports and imports of weapons is estimated from various product and country residuals in the published Soviet foreign trade listings. Most of these approaches share the basic weakness of any "residualizing" method--the estimates are affected to an unknown extent by cumulative errors generated by the inability of the estimator to accurately separate military from non-military elements. Thus, none of the numerous studies done in the past produced acceptably accurate estimates. SOVA has in the past intermittently evaluated studies based on alternative methodologies undertaken by specialists outside the Agency and explored the feasibility of such methodologies "in house". Reassessment of these studies was outside the purview of this panel, but we did interview several outside specialists associated with these approaches, seeking their views of the Agency's building block method and any insights their own work could provide in this area. These interviews did not indicate significant progress in the outside efforts. Poor results of earlier studies within the Agency, the tenuous nature of conclusions reached in similar studies undertaken by outside specialists, and staffing problems seem to have resulted in very low priority for work on alternative methodologies within SOYA. This is regrettable and should be corrected, as the set of alternative methodologies has the SECRET 39 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 SECRET 0 potential to provide at least a partial verification test for estimates derived by the building block method. The recent publication of the Soviet handbook on the state budget for the 1976-1980 period makes it possible to work through the budget residual method again, particularly as we now know more about the intricacies of the republican-union divisions in the budget. Thus, it would be useful to check whether the ruble estimates of defense'expenditures (adjusted roughly for post-1970 price changes) could fit under various unidentified residuals in the union part of the Soviet state budget. However, the issue of the comprehensiveness of the Agency's coverage of Soviet defense costs must be raised in a wider frame of reference, particularly when the estimated defense expenditures are used to assess the economic burden of defense. The measurement of the defense burden currently performed by SOVA is defensible in its own terms. But even with a "broad"- definition defense numerator the burden definition is still narrow, as we noted in Section II E. The Soviet economic system differs from the U.S. and other market economies by a much higher integration of military and para-military activities with the civilian economy. A number of economic activities directly related to the Soviet defense effort are excluded at present from SOVA's concept of the defense burden. Some of these activities are difficult to quantify, others could be incorporated with SOVA estimates. Students of Soviet defense-related activities have identified the following items (in descending order of "quantifiability") i Civil defense , Costs incurred by industrial enterprises not subordinated to the Ministry of Defense to maintain reserve facilities for expansion of defense output (including trucks and other means of transportation registered with military units which could be transferred to the military forces when required) Other costs associated with the maintenance of the mobilization potential Additional construction and capital maintenance dictated largely by military needs (use of highways as landing facilities for aircraft, radio and other communication networks, etc.) The BAM railway is believed to have an important strategic as well as civilian purpose. SECRET 40 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 SECRET 0 -- Costs of additions to and maintenance of strategic reserves of non-military supplies (grain, POL). -- Costs incurred by the KGB and GRU for covert procurement of defense-related Western technology. As can be easily seen from this (by no means complete) list the economic costs associated with defense efforts not captured by SOVA estimates seem high and, if measured, might add several percentage points to the defense burden. On the other hand, some military expenditures now included in the CIA estimates provide partial benefits to the civil economy. For example: general education and health outlays on the armed forces improve the productivity of. the demobilized recruits when they reenter the labor force; Soviet military personnel are regularly used to help bring in the harvest; Soviet construction troops have built Olympic stadiums or other objects of civilian use. These civil benefits should, in principle, be subtracted from the enlarged estimate of total military expenditure to obtain a more meaningful measure of burden. While the Soviet economy is surely more highly militarized than that of the United States, the problems discussed have some parallels in this country. Examples of essentially military outlays not now counted in U.S. measures of military expenditure are civil defense and emergency mobilization planning. There are also activities of an apparently civilian character that have military components or potential military use. Thus, in a comparative context, the defense numerator of U.S. burden calculations would also have to be reexamined, for both additions of nominally civil costs that are in fact military and subtraction of identified military costs that produce civil benefits. Clearly, however, the most important question concerns the degree to which the Soviet burden is understated by current measurements. It is not intuitively obvious where to draw the line between military and civil activity in either economy, but this should not preclude a serious examination of the issue. A logical first step is development of the concept to be followed by an attempt at estimation of the relevant magnitudes. C. Robustness of the Estimates As indicated in the introduction, the accuracy of estimates may be gauged by comparison with the external referent the estimates are supposed to replicate. In principle, neither the dollar nor the ruble value of Soviet defense in the SCAM model has such an empirical referent; except for the ruble value in 1970, both are purely intellectual constructs. The components of these aggregates may be evaluated by tests of plausibility or SECRET 41 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Jtl.Kt I ? even, in a few cases, accuracy as defined here. However, the overall aggregates themselves are not easily assessible in these terms. L. 11V r% lJ C l l Y, relating to the total value of defense expenditures at particular times and concluded that these were broadly consistent with SOVA's estimates. As the paper notes, there is considerable uncertainty about the coverage and price basis of the Soviet statements. "The most meaningful information" is said to come from a former Soviet economist who claimed to have seen a summary statement of defense expenditures relating to 1969 and 1970 at the USSR Central Statistical Administration. These are years for which CIA estimates may expect to approximate closely Soviet figures in current prices. Otherwise, the only major test of accuracy that can be applied is robustness--insensitivity to change through successive estimating efforts. Each year a new 30-year series is produced and we can look back to see how the totals and subtotals have changed with each succeeding estimate. The following material briefly summarizes the results of a test of robustness: ? 1. The Ruble Estimates d il f e a By this test the ruble estimate of Soviet defense dramatically and publicly in 1975-1976. For the ruble estimates of procurement, the series calculated after that date are essentially different from those presented before. Coincidentally, the RDT&E methodology changed at about the same time. However, while the RDT&E estimates composed since the mid- seventies appear almost perfectly robust, this is si,mply because of the stagnation of the estimating procedure for this category. For the remaining categories, we did not have complete sets of data at our disposal but the missing years are sufficiently few in number that several judgments can be made confidently: a. Consider the several annual estimates, made after the big revision, of the individual resource categories in the year 1970. The ratio of the maximum to the minimum values of these several estimates was 1.24 for investment, 1.13 for operating and 1.12 for total expenditures (including RDT&E). That is, successive revisions of the same datum in the major components of the total yielded a moderately narrow range, so that the range for total outlays seems acceptably small. b. The range tends to increase in later years; e.g., SECRET 42 25X1 25X1 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 SECRET ? the investment ratio is 1.29 for 1976 and 1.3 for 1982. In considerable part, this simply says that recently made estimates applying to recent years exhibit a naturally greater degree of changeability than estimates for an earlier year on which very considerable attention had been focused previously. In addition, however, the investment range is associated with the fact that estimates made in year t for the years t, t-1 and t-2 are colored to greater or lesser degree by inclusion of the leading edge of the costs of systems that have not yet been deployed--in short, what appear to be realized outlays are in part assumed costs of future systems. c. Increase in the range of successive estimates is also observed for rates of growth. With respect to estimates for the years 1971-75, the average annual rate of growth of investment (to take an important category) varied among the different estimates by as much as 2 percentage points; for 1976- 1980, the variance was as much as 4 percentage points. The explanation is, of course, exactly similar. d. In general, there is a tendency for the absolute value of any resource category to increase with successive ost-1976 sample of estimates is too th e p estimates. However, 1979, and 1982) small (there are only four--made in 1977, 1978, to assess the durability and significance of the apparent h f ontribution to this effect so c h is e L. ie tendency, especially as t far has been the revision of ruble-dollar ratios carried out last year. This revision introduced a means of estimating uncertainty and minimizing bias resulting from uncertainty. e. Among the resource category components of the total, construction was the most volatile; the 1970 entry quadrupled between the estimates made in the early 1970s and and those made in 1982. Last year, the methodology changed sharply, as explained earlier. Consequently, on robustness grounds alone, the Agency's published self-evaluation seems supportable: the estimates are best for the early 1970s and particularly 1970; total outlays are more reliable than the components, which vary sharply in the confidence that can be reposed in them. 2. The Dollar Estimates The sample available to us was different from the sample of ruble estimates for technical reasons. On the other hand, since there was no dollar revision to match the ruble "revolution" of 1976, we should be able to compare estimates made throughout the 1970s. The following tabulation helps sum up the results: SECRET 43 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 ? 0 0 Dispersion in the Successive Annual Estim*ates of the Dollar Cost of Soviet Defense Estimates Made During 1971-82 for 1970 1975 1980 Number of Estimates 12 7 4 Ratio of Maximum to Minimum Value Total Outlays 1.19 1.11 1.04 Investment 1.64 1.19 1.06 Operating 1.27 1.11 1.03 Ratio of Maximum to Minimum Value Four Series Having 1980 Entry for Total Outlays 1.06 1.05 1.04 Investment 1.19 1.16 1.06 Operating 1.03 1.04 1.03 *On a common price basis of 1979 dollars. SECRET 44 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B00420R000701450001-4 JGI.RL I Here there appears to be greater scatter for 1970 than for 1975 or 1980. In part this is due to the larger number of series available for 1970, but the tendency appears to persist even when we use only those series that have a 1980 entry. The more important explanation, however, is that the estimates for the different years are not always comparable in the classification rules they used--e.g., with respect to the classification of spare parts alternatively as 0&M or procurement. There appeared to be some confusion because of this in the first half of the 1970s. After consistency was imposed on the classification rules, the degree of scatter fell off sharply. As with the ruble estimates, there is considerable difference in volatility among the resource categories; construction is again the outstanding example, with a sharp upward rise. However, successive estimates did not change the direction of movement over time. Surprisingly, there appears to be a downward pattern in the successive estimates for personnel costs in 1970. On the whole, therefore, the dollar cost estimates have stood up well to successive reestimations, especially if account is taken of the changes in classification that occurred in the first half of the past decade. D. Biases and the Critics Bias is usually associated with systematic, as distinct from random, estimating error. In this section we examine the claims of a number of critics of the CIA estimates that the latter indeed err systematically in particular directions. Both the dollar and the ruble estimates have been charged with bias and in both directions. We have not attempted to assess all the criticism we know of, only those of some significance. One cannot assume that the critics cancel each other out and that the estimates must be "about right." Nevertheless, the panel's judgment is that the critics' charges, in the main, are not justified. Our comments are subdivided by the category of CIA estimate criticized: 1. The Dollar cost of Soviet Defense Professor Franklyn Holzman has argued in print that the dollar costs are biased upward because of overvaluation of military wages and equipment prices. Both charges were based on insufficient information on CIA procedures. Professor Holzman thought military wages overstated because U.S. wage rates were too high for the less skilled, less educated Soviet military cohorts. However, the SOVA costing model does not attempt to replicate the capabilities or productivity of the Soviet force, but only its size and distribution by military function. Similary, Professor Holzman's belief that there was a systematic SECRET 45 Approved For Release 2009/10/06: CIA-RDP86B00420R000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Stl.Kt I ? upward bias in the valuation of Soviet equipment was based on some misleaing CIAtcostinglaimedbat also o on n a a m performance comparisons. Criticism of the dollar estimates because they apply U.S. military wage rates to Soviet conscript personnel is frequently heard in the United States. One of the most popular complaints alleges the absurdity of a situation in which a U.S. pay raise automatically increases Soviet "expenditure." Part of the problem is the failure to recognize that what is being measured is the cost *in the United States at base year prices of raising and maintaining the Soviet force. Thus, if the dollar prices used in the estimate are those of the year in which the pay raise occured, it is entirely proper that the dollar costs of Soviet military programs should reflect the new U.S. pay rates. Moreover, these rates would apply to every annual entry in the series, thus leaving the growth rate of personnel cost largely unaffected. If the base year of the dollar cost series were an earlier year, the military pay rates used to aggregate military manpower would be those prevailing in that earlier year and not the later, higher rates. The critics are also unaware that the ratio of Soviet to American personnel costs in dollars is manower- of military i son considerably lower than a compar becauserthe CIA quantities and average pay rates would indicate, to functions use t officers Soviet armed U.S. foranks to rces tend the dollar calculation n Soviet assigns where personnel l and the U.S. force would use noncoms. A number of critics have argued that the dollar estimates are downwardly biased. Most prominent among them is Professor Steven Rose i- e. We have already referred to his main charges-- failure to take account of intervintage technological change and improper adjustment of base year equipment prices for learning in production. We have satisfied ourselves that Professor Rosefielde was misinformed on the first issue (however, see immediately below). The second, we believe, is arguable but we find the CIA position a defensible interpretation of production index theory. It may be useful to add a few words here on the question of intervintage change. The effect of failure to take account of such change in cost estimating models is not only to lower the level of a constant dollar series but also to understate its growth rate. Professor Rosefielde believes, on the basis of various calculations by other observers, that U.S. military technology improved at an annual average rate of about 6 percent in the 1970s. He asserts that the rate of technological despite the fact that in the USSR , improvement was even faster ? Soviet design philosophy aimed for incremental change rather than SECRET 46 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Jtl.Kt I 0 0 state-of-the-art development. His calculations indicate that Soviet technological improvement cumulated to a 252 percent increase in the 20 years 1961-1980, against 121 percent for the United States. Professor Rosefielde also states that if the CIA estimates do in fact incorporate an allowance for qualitative change, the rate of Soviet technological improvement was even faster than the above numbers suggest. Apart from some unpublished, vague and judgmental assessments by others, the basis for Professor Rosefielde's belief in the higher rate of Soviet qualitative change is the difference between the rate of growth of the CIA ruble procurement series and the rate of growth of the series calculated by William T. Lee several years ago, which was derived by calculating a presumed hardware residual in announced Soviet values of machinebuilding and metalworking output. The panel has not examined Mr. Lee's calculations in detail. However, it is impressed by the serious methodological objections to his estimates raised by several observers, inside and outside CIA. The plausibility of Professor Rosefielde's estimates of Soviet technological change may be roughly gauged by calculating the change in implied ratios of Soviet to American quality levels. If one believes that the qualitative level of Soviet weaponry was, say, one-third below that of U.S. weapons circa 1960, using Professor Rosefielde's quality growth rates means that one must also believe that the average level of Soviet weapon quality is now higher than that of the U.S. On the other hand, if one believes that Soviet quality is now at least one- third below that of U.S. weapons, the implicit on of Professor Rosefielde's series is that the 1960 ratio must have been considerably less than half. The paradox is even sharper because, as indicated, Professor Rosefielde suggests that his estimate of the rate of change in Soviet technological improvemnt may be understated. Finally, we should note that while Professor Rosefielde accused the CIA of using fixed vintage CERs in his published work, he has recently amended his charge: he now acknowledges that revisions are made, but he asserts that the revisions are insufficient to deal with the problem. 2. The Ruble Value of Soviet Defense Professor Holzman has contended that the ruble estimates in 1970 prices understate the rate of growth primarily because the ruble-dollar ratios used to convert much of procurement from dollars to rubles are averages for highly aggregated elements and that these elements represent 1970 dollar values. "Subaggregation in 1970 dollars reduces the rate of growth of these subaggregates because it puts a relatively low price on the SECRET 47 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Jtl.Kt I 0 0 fast-growing modern Soviet weaponry and a high price on the relatively constant-sized army." We referred to this problem as it applies to estimating U.S. defense costs in rubles (Section II F). As we noted there, however, Professor Holzman is largely mistaken: it is true that in the absence of ruble prices or. ruble-dollar ratios for every item of procurement, the use of average ruble-dollar ratios automatically implies subaggregation in dollars at some level. However, (a) the subaggregation takes place at rather disaggregated levels; (b) it does not take place in 1970 dollar prices but in differing price levels depending on when the calculation is made; (c) an adjustment is made to the average ruble-dollar ratios to account for greater or lesser technical complexity in the items with unknown ruble prices or ruble-dollar ratios. These adjustments are somewhat speculative and may have considerable estimating error, but they tend to rule out the probability of systematic Has in the growth rate of the series. A number of observers in and outside the government have contended that the level of the ruble estimates is biased downward. The substance of some of these arguments--particularly by Andrew Marshall. Director of Net Assessment of the Department of Defense, of DIA, or Major General William Odom, Assistant Chief of Staff, U.S. Army--relating to the scope of activity coverage of the estimates, has been discussed in Section III B above. Other criticisms concern the adequacy of the CIA's ruble prices as measures of real opportunity cost. This issue was discussed in Section II E. We may note again that the panel found merit in some of these critiques and has made a number of suggestions to deal with them. Professor Rosefielde is also one of the strongest critics of the ruble estimate: he charges that both the level and the rate of growth are downwardly biased. His criticism with respect to the Agency's estimates made after the 1976 revision are essentially reflections of his charges against the estimates in dollars. Since the panel has not reviewed the 1976 revision, it decided not to evaluate Professor Rosefielde's critique of the pre-revision estimates or the validity of the Agency's justifications for the revision. 3. Comparisons of U.S. and USSR Defense: The International Index Number Pro em As noted earlier, comparisons of value aggregates in one country at different times or in two countries at a single time present an "index number problem," in that use of different price weights inevitably yields different ratios of comparison. Thus, U.S. and USSR defense may be compared in rubles or in dollars; both are legimate yardsticks, but the answers will be SECRET 48 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 different. CIA performs both calculations, but Professor Holzman is sceptical that the spread between the USSR/U.S. ratio in dollars and the complementary ratio in rubles can be as small as CIA claims it to be. Apart from his criticism of the CIA dollar costs of Soviet defense, Professor Holzman belives that CIA's estimate of the ruble value of U.S. defense is biased downward, for two reasons: (a) U.S. weapons that the Soviets are incapable of producing because of technological inferiority are costed by CIA in rubles as if the Soviets could have produced them and are valued by means of ruble-dollar ratios applying to much less advanced equipment. Professor Holzman has a point, in that products unique to one economy in a two-economy comparison pose difficult measurement problems. However, the conundrum is faced in all international and intertemporal calculations, and usually ad hoc adjustments are undertaken to resolve the problem. CIA does the same, adjusting the relevant, category-average ruble- dollar ratios to compensate,at least in part, for the U.S. technological superiority. (b) The same problem ofsubaggregation in dollars before conversion to rubles that downwardly biases the rate of growth of the ruble value of Soviet defense also leads to systematic understatement of the level of the ruble cost of U.S. defense. The response to Professor Holzman on this charge is the same as that indicated with respect to the growth rate of Soviet defense i n rubles. Professor Holzman, however, is justified in complaining that ruble U.S.-USSR comparisons occupy a back seat to the dollar comparison, whereas both are in principle equally legitimate measures of relative size. He is also correct in observing that whereas the CIA U.S.-USSR GNP comparisons usually average the ruble-based and dollar-based Soviet-to-American ratios by the geometric mean, CIA almost never averages the counterpart defense ratios. However, these issues are primarily matters of the use of CIA estimates rather than of the methodology itself, thus outside the mandate of this panel. 4. The Burden of Soviet Defense: The Intertemporal Index Number Prob em In additon to his criticism of the ruble Soviet defense series, Professor Holzman has also charged that the burden calculation, dividing Soviet defense by Soviet GNP, both valued in 1970 factor costs, is upwardly biased. He is correct in asserting that the burden in any year ought to be calculated in S the prices of that year, because that set of prices is the only one reflecting the opportunity costs of the particular defense SECRET 49 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 SECRET 0 0 0 allocation. As Professor Holzman is aware, the difficulty of obtaining contemporary prices was the reason for maintaining the series in 1970 prices. Further, he is convinced that using 1970 rather than 1980 ruble prices to measure the burden in 1980 exaggerates the calculated ratio, because the costs of military procurement would have declined much more rapidly between the two dates than the prices of other components of GNP. The panel believes arguments can be adduced in either direction. Morever, Professor Holzman appears to identify rapid price decline with rapid modernization. This may not necessarily be true, but we shall have to wait until the CIA estimates are coverted to a new price basis to determine whether contemporary prices lower or raise the burden calculation relative to that in 1970 prices. SECRET 50 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 SECRET 0 0 IV. MANAGEMENT When the regional reorganization of DDI took place, one of the most prominent changes affecting the Soviet area was the dissolution of the Military-Economic Analysis Center (Division) and distribution of its functions among two divisions of the new Office of Soviet Analysis. Roughly coincidentally, a reduction in size took place. At the beginning of 1983 there were approximately 28 analysts counted as involved in the estimating process, although the full time equivalent number of analysts was probably 15-20. The counterpart number of analysts in 1981 was 35, almost all of whom were assigned full time to this activity (including 2-3 working on China). Also, many of the senior managers and analysts of the MEAC period were promoted or reassigned and thus were no longer involved in military economics. The reasons for these changes are various and understandable. The reallocation of resources away from military economics no doubt paid off in the sense that researchers were made available for other tasks with high visibility and priority. But these changes did have a noticeable impact on the intensity and quality of the work on military economics, as suggested by the experience of the 1982 update of the military expenditure estimate. Under the best of circumstances (had MEAC or its equivalent been continued' and at approximately the 1980-81 level of effort), the 1982 update would probably still have concentrated on some aspects of the task and coasted on others in which major modifications had recently been completed, as for example, the methodology of estimating construction. Given the nature of the organizational changes in 1981-82, this narrowing of focus and an inclination to live off past capital, was accentuated. We believe that the new arrangements disrupted the update and affected its quality in several important ways: 1. The 1982 update was distinctive because it was prolonged. Ordinarily, these annual exercises have taken about four months from start to finish. According to the formal schedule issued in November 1981, the 1982 update should have started in mid-December and been three-quarters complete by mid- April. In fact, it took the better part of 8 months, from February to August 1982, to produce the first version of the ruble paper. 2. It was characterized by a somewhat erratic progression of the normal stages of the update. The sequence usually follows the order: forces, costs, indexes, rubles, with relatively even distribution of time segments. In 1982, the formal phase of SECRET 51 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 SECRET ? force updating lasted more than three months, the cost phase some two to three weeks, the index phase a surprising six weeks, and the ruble phase a further two-plus months. This resulted in part from the fact that while the order of stages was formally preserved, it was frequently necessary at later stages to redo earlier parts of the estimates. Such a process is by no means unprecedented, but the extent to which it was required in 1982 was unusual. 3. This affected the quality control inherent in the normal process of orderly, staged updating. At each point of the update, the parameters of the next stage are kept constant, and this is an important way of maintaining a watch for anomalous patterns developing within each stage. Because the stages were to a considerable extent intertwined in the course of the update, that element of quality control was difficult to maintain. 4. An additional problem of quality control in 1932 was the decentralization of the process of estimation, resulting in the lack of a clear central focus and control point. 5. According to the memo by D/SOVA initiating the process, the 1982 review was to cover the forty-four year period, 1951- 1994, to give the force analysts an opportunity to review our historical base... [and] to reinforce the data for 1989 by capturing follow-on systems and costs which tend to unrealistically fall off at the end of the estimate." But this apparently depended on the forces review being conducted by the old NFAC projections working groups, which were supposed to begin their part of the update in the last half of December 1981. Unfortunately, the projections working groups were moribund this past year and did not contribute to the updating process. 6. The final long delay in the completion of the ruble part of the estimate was due to concern about the validity of the estimate rather than to organizational problems, and indeed The demonstrates one of the advantages of the new arrangements. questions raised by the slow growth of procurement revealed in the 1982 update could be addressed and resolved within SOVA against the background of all the Agency's work on Soviet economics. The 1982 update clearly revealed the toll on military economics that had taken place in the course of the reorganization. The military economic effort, with its inherent complexity, sophistication, and requirements for understanding by those who operate the models taxed the reduced and relatively less experienced human resources available. There were now fewer and many of them were new to the t em analysts to work the sys business; the models in the system were not well understood; and there were important competing demands, especially in the Defense SECRET 52 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 SECRET 0 Industries Division. All this, plus the lack of experience in doing a decentralized update with reduced staff, resulted in the characteristics already noted. Some of the difficulties revealed in 1982 can probably be repaired within the existing framework. The working groups can presumably be reconstituted and their efforts made more central to the whole process. The analysts who were new in 1982 have now accumulated considerable experience and fewer delays will ensue on this account. However, there remain two longer term problems whose resolution involves larger resource issues: 1. Whatever the size of the effort that will be undertaken this year and in the future, the panel believes that one of the clear losses from the reorganization is that of a central directing focus. The military-economic estimating process is too diverse and complex to be left to operate essentially on its own. Central direction is needed, in the first place, to maintain control over the speed and quality of the annual updates. It is also needed to provide a focus for evaluating new findings and to take responsibility for reconsidering conventional wisdom. The panel sees no alternative to providing more focused management. How that should take place is, of ? course, something that must be left to the office director. It seems to us that central direction will benefit the operation most if it is continuous rather than ad hoc or occasional. 2. The military economics effort inherited from MEAC was a large complex system that required substantial manning and vigilant control to maintain quality. Present resource constraints raise the question of options for future maintenance and development of the estimates. One option would be to attempt to recreate essentially the conditions that prevailed in 1980-81 regarding mode of operation and level of resources. Alternatively, it would be necessary to review the mode of operation to permit functioning within reduced resource limits. Several ways of cutting the costs of the annual updates have been suggested, including doing updates less frequently, cutting back the number of years being reviewed or staggering the scope of the annual update--e.g., covering the period before 1960 or 1965 every five years instead of each year. One might consider reducing the required degree of accuracy or introducing short- cuts in the modelling procedure. Such changes would probably reduce SOVA`s ability to answer the range of questions currently directed at it by its various government clients, of the type, "what would it cost the Soviets to counter a U.S. program of such and such a size in the x mission"? In this connection, the panel wonders whether the labor cost ? of the annual updates can be reduced by changes in the modelling SECRET 53 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 SECRET ? apparatus. SOVA is now in the process of developing a follow-on to SCAM II. It might be advisable to elaborate that follow-on, at some increase in the cost of the one-time transition, in order to reduce the operating costs of updating once the follow-on is in place. We should, however, note the opinion expressed by a senior SOVA analyst that model tinkering without moving to a higher level of aggregation would not yield significant savings in labor costs. Despite the weight of this opinion, it seems to us worth raising the issue for further consideration. The problem of matching resources and estimating requirements provides another argument for reestablishing centralized direction of the military economics program. One of the important tasks of central control would be to encourage methodological innovation, especially of a cost-reducing type. To sum up, it appears to us that there is an important management dilemma with respect to insuring the quality of the military-economic effort at SOYA. The sophisticated apparatus built up over the past decade or two requires sizable resources and ongoing centralized leadership to preserve the quality of the estimates and to serve the continuing needs of the policy community. The 1982 update foreshadowed the possibility of more difficulties in the future if no action is taken. The panel considers it unreasonable and impractical to cut back on quality and ability to respond to customer demands, and sees no way to avoid augmenting resources, especially if our recommendations for improvements in methodology and estimating procedures are implemented. Streamlining procedures could perhaps help limit the increase in cost. But either choice, we believe, should include setting up a focus of responsibility for the estimates, to insure maximum quality and responsiveness to policy requirements. ? SECRET 54 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B00420R000701450001-4 SECRET 0 0 V. RECOMMENDATIONS In this section we summarize our major conclusions with respect to the concepts, methodology, procedures and management of the Soviet military expenditure estimates, and offer our suggestions for actions that can be taken to improve them. 1. There is no doubt in our minds of the value of the estimating effort, both in terms of the need for and the usefulness of the product and in terms of the quality and analytical relevance of the estimates as now constituted. While we have been critical of various aspects of the system of estimates and recommend a number of changes, we have a high regard for its overall quality and for the talents of those who have been responsible for its development over time. Particularly large qualitative improvements were made in the last half of 1970s. We are also convinced that the estimates respond to a genuine requirement for measures of Soviet military economic activity. Defense policymaking is better served by the CIA's making these estimates than by dropping them and leaving clients to produce their own estimates. We recommend strongly that the effort be continued and supported appropriately. 2. The panel has noted the resource allocation burden of operating the estimating effort and of the logical choices available to SOVA management of cutting the coat to match the cloth or providing more cloth. Some savings may be possible, through reducing the frequency and scope of coverage of updates or perhaps through modelling refinements, but we believe that maintenance of quality has proved to be and will continue to be difficult at the current reduced staffing level. Moreover, the need for methodological improvements, discussed in this report and summarized below, suggests that in fact additional resources will be needed. 3. Whatever the decision on resource allocation, the panel believes it essential to provide centralized, ongoing direction of the estimating effort, for the reasons set out at length before. 4. The panel wishes to express its strong support for the ongoing effort to develop a follow-on to SCAM II. The deficiencies of SCAM II are fully appreciated by SOYA, and it is clear to us that a follow-on development is needed. 5. With respect to the estimates themselves, our recommendations are set forth here in rough descending order of priority. A major recommendation is that high priority be given to improving the estimates of RDT&E. The present estimates are conceptually and methodologically deficient. Alternative SECRET 55 Approved For Release 2009/10/06: CIA-RDP86B00420R000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 SECRET ? ? approaches now being pursued at a slow pace should be accelerated to the extent possible. Until those approaches are ready for application: More effort should be put into the present approach and into making it more defensible, by more thorough exploitation of relevant available data. ? The published analyses should skip lightly over the RDT&E numbers and exclude them from the totals displayed. 6. The Agency's ruble measure of Soviet burden are valid indicators of what they purport to measure. However: ? Greater care must be taken in published analyses to be explicit about the limitations of this measure. ? More effort should be put into attempting to identify how Soviet leaders might conceptualize and, measure the Soviet burden. ? It is highly desirable to try to provide some rough indications of the magnitude of broader measures of burden, which would incorporate other sets of activities deriving from the greater militarization of the Soviet economy relative to that of the United States, and reflecting the full opportunity costs of that higher level of militarization. 7. The panel strongly supports SOVA's decision to shift from 1970 to 1982 prices as the constant price base of the ruble estimates. However: ? A new, detailed and comprehensive set of 1982 adjusted-factor cost GNP accounts must be developed to complete this shift, in order to make burden measurement possible in the new set of prices. ? While the changeover to 1982 prices will represent a major improvement in the measurement of burden compared to the previous methodology, even the new series will soon begin to diverge from measures at current prices. Therefore, we recommend that after the completion of the shift to 1982 price base SOVA attempt to maintain current as well as r measures of defense expenditures and defense burden. 0 8. We have suggested a variety of studies of price setting SECRET 56 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 ? Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 SECRET in Soviet defense industry and complementary studies of ruble- dollar price ratios drawing on foreign trade data and information of Soviet arms exports. We believe such studies would be useful for the calculation of procurement ruble-dollar ratios in a broad range of categories and serve as a check of their plausibility. 9. Defense industrial research is an area which CIA has worked for a long time, but it is probably fair to say that the effort has been primarily technical-engineering in orientation and that the economic-organizational research has been sporadic and pursued at a not very intensive pace. Again, competing demands or scarce resources are major explanations, but the fact remains that many questions on price policy, decisionmaking, relations with the civil sector and the like, can only be answered on the basis of research in depth in this area. 10. The panel believes more can and should be done to explore alternative methodologies of estimating Soviet military expenditures exploiting Soviet economic data. Previous investigations inside and outside the Agency of these methodologies have had various drawbacks and flaws, but SOVA should pursue the subject on a more regular basis. The purpose of this research is to search out possible signals of error in the building block approach, to enhance the credibility of the estimates and to help fit the estimates into the GNP accounts. 11. Expenditure is a measure of flows, some of which are increments to stocks, but military power is a function of the stocks themselves. Expenditure comparisons continue to be misinterpreted in a military capability vein, and so far CIA has not developed true inventory measures of military equipment stocks. Cumulated expenditures on procurement and construction over a prolonged period do yield a crude approximation to stocks, but these proxies are deficient because they do not take account of depreciation and obsolescence. There is a need for estimates of weapons stocks in all classes that will take account of these factors. Such estimates can then serve as the basis for further comparisons at a force or mission level. 12. An important dimension of Soviet military economics is mobilization capabilities. A preliminary study on this subject was done a few years ago but it was incomplete, hastily accomplished and has never been integrated with other parts of the military-economic structure and general economic studies. This is also the heading under which it would be useful to study the role and magnitude of Soviet strategic reserves. 13. Considerable public attention under the Reagan administration has been drawn to Soviet technology imports, clandestine and overt, and their presumed contribution to the SECRET 57 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B00420R000701450001-4 SECRET Soviet military buildup. But the apparent need for an assessment of these flows has not yet resulted in carefully drawn measures of size and impact. 14. The Agency has shied away from extending U.S.-Soviet comparisons to the level of NATO-Warsaw Pact. There are substantive reasons for the reluctance, but the pressure of demands for studies of Soviet defense as well as resource limitations have been sufficient to keep Warsaw Pact studies on a very distant back burner. The regional reorganization, by relegating Eastern Europe to EURA, has contributed somewhat to this result. Doing NATO-Warsaw Pact comparisons is not of the highest priority, but there is considerable external criticism of U.S. government use of.Soviet expenditure estimates which points to the absence of alliance-wide comparisons. The problems of costing NSWP forces should be reexamined. 0 0 SECRET 58 Approved For Release 2009/10/06: CIA-RDP86B00420R000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 SECRET 0 Appendix A U.S. Government and Non-government Observers onsu tea--by the Methodology Panel Paul J. Berenson, Special Assistant to the Under Secretary of Defense for Research and Engineering Abram Bergson, George F. Baker Professor of Economics, Harvard University** Igor Birman, President, Foundation for Soviet Studies Daniel L. Bond, Director, Centrally Planned Economies Service, Wharton Econometric Forecasting Services Donald F. Burton, Delphic Associates Inc. Felix Fabian, Lt. Col. USAF, Office of the Assistant Chief of Staff, Intelligence, Hq, USAF Office of the Inspector General, CIA Daniel Gallik, Bureau of Nuclear Weapons and Control, U.S.' Arms Control and Disarmament Agency Franklyn D. Hozman, Professor of Economics, Tufts University Holland Hunter, Professor of Economics, Haverford College Gene R. LaRocque, Rear Admiral USN (Ret.), Director, Center for Defense Information Directorate for Research, Defense Intelligence g nn cy Herbert S. Levine, Professor of Economics, University of yl William Manthorpe, Assistant for Net Assessment, Office of Chief of Naval Operations Andrew W. Marshall, Director of Net Assessment, Department of Defense Directorate for Research, Defense Intelligence Agency William E. Odom, Major General, USA, Assistant Chief of Staff ? for Intelligence, U.S. Army** SECRET 59 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 SECRET ? 0 0 Steven S. Rosefielde, Associate Professor of Economics, University of North Carolina Chairman, National Intelligence Council, CIA ----- ------- * List of those who appeared before the methodology panel or submitted materials to it. In addition, a few persons were consulted informally and still others were invited to participate but were unable to do so. **Submitted materials only. SECRET 60 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 0 Approved For Release 2009/10/06: CIA-RDP86B00420R000701450001-4 SECRET Appendix B List of Supporting Materials Submitted by Observers Consulted Paul J. Berenson, Special Assistant to the Undersecretary of Defense for Research and Engineering Letter tol I Chief, Military Economic Analysis Center, OSR, CIA, 15 January 1979. Memorandum for the Assistant Vice Director for Research, DIA, 8 December 1980, SECRET. Memorandum for the Under Secretary of Defense for Research and Engineering, 14 December 1982, SECRET. Abram Bergson, George F. Baker Professor of Economics, Harvard University. Letter to the chairman of the methodology panel, 20 January 1983. "On the Measurement of Soviet Real Defense Outlays," to be ? published in Padma Desai, editor, Marxism, Central Planning and the Soviet Econom : Economic Essays in Honor of Alexander Erlich, MIT Press. Igor Birman President, The Foundation for Soviet Studies Statement: Russian, 3 February 1983; second revision of English translation, 3 April 1983. Holland Hunter, Professor of Economics, Haverford College "Embedding Defense in the Soviet Economy," memorandum to the chairman of the methodology panel, 7 February 1983. William E. Odom, Major General USA, Assistant Chief of Staff for Inte igence, U.S. Army William Odom, "The Riddle of Soviet Military Spending," Russia, 1981, No. 2, pp. 53-58. Steven S. Rosefielde Associate Professor of Economics, University of-North Carolina. "Status Report on Reconciling NAVSEA's and the CIA's Estimates of the Dollar Cost of Soviet Naval Procurement," 3 November 1980. "Expanded Statement Prepared for the Subcommittee on SECRET 61 Approved For Release 2009/10/06: CIA-RDP86B00420R000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 ? Estimates of the Ad Hoc Oversight Committee on Estimating Military Expenditures Convened by the Deputy Director for Intelligence of the CIA," 18 February 1983. "CIA Ruble and Dollar Estimates of Soviet Procurement: Derivation, Economic Meaning and Verification," 22 February 1983. "CIA Estimates of Soviet Defense Spending: Summary of Principal Issues in Dispute Raised at the Ad Hoc Oversight Committee on Estimating Soviet Military Expenditures, CIA Headquarters, February 18, 1983," 24 February 1983. Jake W. Stewart, Captain, USN, Executive Director, CNO Executive Panel. "Soviet and U.S. Defense Expenditures: The Naval Case"(U), author not indicated, indicated as dated January 1980, SECRET. 0 SECRET 62 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 18 November 1983 MEMORANDUM FOR: Director of Soviet Analysis FROM: D Chief, Econometric Analysis Division eputy SUBJECT: MEAP Meeting, 4-5 November 1. A full day of briefings were held on 4 November (a copy of the agenda ons on is attached). The mornievoEadhtofltheespeakersefromithe Forces physical estimates of production. Divisions were well prepared and d made showed considerable interest and preparation for the afternoon discussion on our projections. presented 2. The afternoon session was more of a potpourri. eady the briefing we have been giving to high-level l remarks co sumers the around town.alr(In ? doing so, he excluded the methodological familiar with them.) Joe indicated the purpose of the presentation was to refresh the Panel's memory of our estimates in doig so to expos recommendationhthato the product we were using in our response we expand our contacts with consumers. The Panel's reaction to this briefing was positive. of DIA. It was an 3. The next presentation was given by overview of recent DIA analysis of thresourcesimplications of Sovietgdefense activities in both dollar and ruble terms. smoothly and the Panel expressed reswork wh~ch wasevseraatlbestelementtentatis of briefing. DIA, unfortunately, presented preliminary. Because some of the analysis was new to SOYA, it caused the webetween Panel to question whether communications abthe le toeassurewthe Panel these effective as they should be. problems were more apparent than real in our discussion the following day. s 4. The final presentation on Friday wvaboutf howlto improve our estimates. This was followed by a lively discussion force projections in general an~hhsw ffortke betterdiuscusessiofonosurimilnvolitavedrythe A E economic data in particular in entire Panel, the forces speakers he?Panel a?clear pectu~e,ofsthel problems participants. I believe it gave t involved in developing the projections and some ideas were discussed which we can put to good use. SECRET Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 ? SUBJECT: MEAP Meeting, 4-5 November 5. The Saturday session= focused primarily on EA's (and to a lesser f extent DI's) reaction to the Panel recommendations. (Atwachededsas ai t of of Panel recommendations put toget er b gathered which s u poi the recommendations into departure for the discussion.) the time was three groups: things we arealdOnatythinkgarehfeasible. are Monot st of, but will undertake, and things we se FY- devoted to the first two groups ad?theeut~lityuof resourmethodolcesogytaonnexmeet them. Joe indicated that we question roduce it given recommended by the Panel that we are membersnarentryingetolkeepoit alive although Paul Cheek competing demands. . thetR&Deproblemnand how he their perception ofits outform his perceptions ofseems then spoke b briefly ab intended to use his additional FY-84 resources to reatescriibtedathndeotherPFIABareas of analysis within his division. Finally, 0 recommendations and our reactions to them. At the close of the meeting noted that he would be in touch with the P SOVA regarding some ideas he had orthe increasing 6. gettmngihisimoneyts worthafrom between meetings to see it that t this in general d he s and sa ti i i the Panel." He spoke to abou e would be providing his ideas a e a memo. Finally, as e ere leang told Doug and I individually he wasfocuthe b Panel's attention more narrowly an e meeting in a long time. I has been been the case recently. mendati Recommendations 7. For your consideration, I would like to propose the following: At succeding meetings we play an activist role in setting the Agenda as we did for this meeting. In and focus particular, ttiss for clear both that the Panel more the better ourselves. the i If DIA is to make a presentation, we require a pre- brief by them as mawe of our n terial and unusualkcommentsaren't surprised by new We restrict DIA attendance somewhat; they had seven people here for the meeting, some of whom were straphangers. SOVA analysts who could have benefited from the meeting were unable to attend because of space limitations. (We may wish to limit the Air Force in the future also. I believe they had four people in attendance.) ? -2- SECRET 25X1 25X1 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 ? Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 SUBJECT: MEAP Meeting, 4-5 November u panel. Such list should inc We give thought to drawing up a list of people from which to select additions/replacements to the 1 de? Academics People with policy making experience People from defense industry (University o Washington) (Stanford) (MIT) (I don't have any names but would like to see someone brought to e rantr". 0 0 Attachments: As stated -3- SECRET Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 f ` Approved For Release 2009/10/06: CIA-RDP86B00420R000701450001-4 2 November 10R3 Military-EconOmic Advisory Panel 04 & 05 November 1983 AGENDA Meeting 04 Nov R3 (SOVA Conference Room) F timates of Og00-1200 Weapons Production Inputs to Soviet Defense SpendinV Overf4 ew of Veapons Production Missiles - Aircraft Clk 4 -n it AyyrPeate Production - Analy,sis of 25X1 25X1 25X1 25X1 0 1200-13nn I3nn-1430 1445-1530 1 530-] r+nn 1600-17nn 1R0n 05 Nov Q3 Lunch Svendinsz and weapons Procurement - Defense timates of Soviet Defense Svendins - DIA Preview of 1Q43 Esti1 ate - Discussion Regarding Panel's Reaction to Slowdown - Panel Members Dinner down country SOYA Response to PFIAR and MEAP reports - chairs Panel comprised of I)GVA 25X1 )FY -1 25X1 Approved For Release 2009/10/06: CIA-RDP86B00420R000701450001-4 Land Ar'"ame SECRET Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 HEAP RECOMMENDATIONS Objectives and Management of the Proms economic data base 1. A single SOVA-wide coordinator of the military needs to be appointed. 0 0 SOYA should affix mandatory qualifications when the dollar and ruble 2. estimates are distributed to the intelligence community. The results of the costing work--particularly for the historical 3. period--should be published on an unclassified basis. The ROT&E estimates are so uncertain that they should be excluded 4. from the totals until they can be substantially improved. User Relations 5. The basis for both the ruble and dollar estimates should be a ressively explained and briefed with the limitations emphasized. 99 6. SOVA should prepare an annex documenting the current methodology. 7. SOYA should organize an annual users group meeting to confer on the current state of the update. SECRET Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 thodolo be redone, making fuller use of accessible be 8. The RDT&E estimates should g. The 1970 ruble price base should be replaced by a 1982 price base. produce a current price subpanel further recommended that SOYA p The methodology every year. estimate--i.e.' the price base would change GNP estimates should be reviewed and high for making p rice base. 10. The methodology to making a Soviet GNP estimate in a 1982 P priority should be given made to expand the ruble price sample--for 11. Efforts should be instance, by using foreign trade prices. 0 0 be done while the ruble price base is being studies should roductivity 12. Special the likely rise in real resource costs due to changed to assess declines. 13. In performing Soviet burden calculations, the effect of including other categories in the definition of defense should be considered. 14. s to the building-block approach should be Alternative methodologies regularly reviewed. 15. Non-US NATO and NSWP should be included in the comparisons. -2- SECRET Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Model (the set of computer programs we use to calculate ? 16. The SCAM II requirements study laced by a new system if a rthe estimates) should be rep analysts' time. shows that this would lead to a more efficient use of Sub panel dations b the Methodolo Additional Recommen l of an economic- articular y se industrial research, p 17. Defen much more intensively. organizational nature, should be pursued 18. The CIA should develop measures of the capital stock of Soviet weapons in addition to the present procurement flow estimates. 19. An assessment should be made of the economic value of Soviet technology imports--both clandestine and overt. 0 -3- SECRET Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 v*-+aa a %. .-.vva a va a aav v%JI t II I IIILGIG PRESS RELEASE 8th Congress ooer W. Jepsen, Iowa hairma n .ee H. Hamilton, Ind. lice Chairman William V. Roth, Jr., Del. lames AbdnoT, S. Dak. seven D. Symms, Idaho -',ack Mattingly, Ga. Jfonse M. D'Aniaio, N.Y. .loyd Bentsen, Texas k illiam Proxmire, V.'is. Edward M._ Kennedy, Mass. aul S. Sarbanes, Md. 3illis "' Long. La. Mitchell, Md. Rug s F. Hawkins, Calif. David R. Obey, Wis. ' James H. SchC-uer, N.Y. '-halmers P. Wylie, Ohio Marjorie S. Holt, Md. Dan Lungren, Calif. Dlympia J. Snowe, Maine Bruce R. Ba, lett Executive Director ontact: 3il1 Maddox (202) 226-3230 1983 --: 95 Joint Eccnornic Committee SD-G01 Dirksen V:ashiny:on, D.C. 20510 (202e 224-5171 EP1i3ARGOED FOR RELEASE TO 6:00 P.M., SATURDAY, NOVEMBER 19, 1983 PROXMIRE RELEASES CIA REPORT ON SOVIET ECONOMY Washington, D.C. -- Senator William.Proxmire (D-Wis.) released today a new CIA study of economic `rends and policy developments in the Soviet Union. The study, prepared by the Office of Soviet Analysis, CIA, was submitted by Robert Gates, Deputy Director for Intelligence, together with testimony presented to the Subcommittee on International Trade, Finance, and Security Economics of the Joint Economic Committee.' Proxmire is Vice Chairman of the Subcommittee. Proxmire said in a statement from his Washington office: "The study presents the results of the CIA's latest study of the Soviet oil industry and Soviet energy prospects into the 1990's, reviews the recent perfor- mance of the economy, and provides new revised esti- mates of Soviet defense spending. "According to the CIA, Soviet economic activity has picked up somewhat in the present year and the CIA now forecasts a growth rate of 3.5 to 4 percent for 1983. However, the CIA has not changed its estimate that Soviet GNP will average only about 2 percent growth annually for the next several years. "The improvement is due in part to improved weather during the past year, in part due to Andropov's campaign for greater discipline. "In contrast with earlier estimates, energy is no longer considered a serious constraint on economic growth during the 1980's. "The CIA now believes the Soviet Union has avoided the downturn in oil production that was'once predicted. Oil production is expected to-continue growing, level off by the middle of the decade, and then decline slowly until 1990. "The revised defense estimates show that the total costs of defense since 1976 has risen by only 2 percent a year, compared to the 4-5 percent annual growth rate previously estimated. The slowdown in the growth rate is due to the leveling off of military procurement since 1976. "The slowdown," Proxmire said, "of Soviet defense growth rates has profound significance that has not yet penetrated policy circles. "In one sense, the CIA's new estimates demonstrate that the Soviet defense program is very large and still growing, although at a slower rate than before. Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B00420R000701450001-4 "But Moscow has not been expanding its effort at, the rapid rate that was once believed. It slowed its defense expansion beginning about seven years ago, a fact that the Soviets neglected to communicate and that the West failed to detect." Proxmire continued, "My own view of the Soviet economy is that we in the West tend to magnify its weaknesses and to overlook its strengths . "The Soviet Union won't collapse or even stagnate for very long just because they have an economic system we do not like. "It is as important that we accurately assess Soviet economic capabilities as it is that we accurately assess Soviet military capabilities." Copies of the CIA report, USSR: Economic Trends and Policy evelonments , may be obtained' from the Joint Economic Committee, btions lica Department, G-01 Dirksen Senate Office Building, Wash- ,gtcn, D.C., 20510, or by calling (202) 224-5321. Approved For Release 2009/10/06: CIA-RDP86B00420R000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 UNITED PRESS INTERNATIONAL 18 November 1983 SOVIET DEFENSE t'ASHINGTON }.~ 1 ;~ r i f r L i? is i 3 '! ? i +f Sk1.I t; tf'# I~br OR-1 ? N {HE ?JL11'Lt1 i:}?f;WJii i if.% 1f ES L%EFEISt COS t 1 HAVE R I ?`.;E Al A ILO IrF: i iIi PKt c :f If i H " iri # 3 fL f H = ~Hi I t'il: '.? V Lt# 3 ~i ~U ?I. I IItU I THE I11Ll l~t-it:2' '?`.~ I LL L t'i~i; #}`11#?2#} 3i" t U+ s V~{(tLti iT?3. L i~~! ,J -' ?t- nn IiiH 1 1 i i? _? T Lt- #: fi # E J I {!,! THE . f!?? ~ f I.%i;: Ft T tJI'i U"'i t itL'10 11thr U R U+ iU L1 r, r, r 1 - - - ,,, 1 i i ~'l ~} t?' f.. ! _ (' #' ( 1 i t ({ .~! i- {- f? ~. ! rr ?? r r- n it F. - ! t ! t; t_1 IIiit vt iL ItlL K PW.:# t LLt.t ?`_ri:ii t' .Liiti:{i Zii1i 11( =.r=3i{ii{\Lv?J i.I.~t{?iL +)+_ J.~i I t.:?Ui4=; L#..+lf## 1 1i T t~lLLlii{S ! F,i~ilf:i.a3 I: Itt ?Js3 t:4.;};{t~3i fi% I}iid~ ? iii!ii 3i rllll' }~ ti r 's titi? 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Ii ;?i Pi'OCURNE t'i L ~iJ L ~ 3!t EM E tI! .. ~ t L IytL WIRE 43 PERCEN I If1.I? t ::3 THE RtrT :, AI It Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 ARTICLE APPEARED ON PAGE - .j . to defense-the military burden-was in a Pentagon whose constantly reiterated fits poorly with another fashionable idea- found to hold at 13-14 percent. political objective is to strengthen the basis that the Soviet economy is weak and -The CIA suggests that most of the, slow- for higher American defense spending. laboring, desperately in need of reform don took place in procurement of new That the DIA, unlike the CIA, unwilling and meanwhile a sure loser in an arms race hardware, the driving force of past Soviet. to unveil its methodology and subject it to with the United States. Two percent eco- defense growth. It attributes. that slow- outside scrutiny does not build,confidence, nomic growth in a bad year is not so bad. down to familiar economic and systemic in DIA's.product. The CIA expects 3-4 percent in 1983. We shortcomings. Yuri Andropov s defense The CIA's ' new estimates bear di- are not sure how the Soviets set their de- position, a CLA briefing paper notes, is rectly on critical policy questions.. fense spending level, but it would be fool- .unclear.... The little evidence that is The estimates call into doubt the cen- ish to think that economic or systemic dis- available indicates Andropov has not ac- tra! political and emotional premise of tress will keep them from doing what they celerated Soviet military spending." the Reagan rearmament program, the feel they have to do. The most important political number in The Pentagon's own Defense Intelli- contention-the conviction-that the the world is the size of the Soviet defense - gence Agency does not, accept the. new Soviet Union was and still is-embarked budget. More than any other single statis- CIA figures. The DIA believes that there on an arms-building program of un- tic or fact, or any combination, it governs , was no slowdown in total Soviet defense precedented dimensions. It turns out our judgrnents- of Soviet,power.and our re- ,. spending in the.crucial ruble account in that the Kremlin has a powerful mili- sponses to it. So it, is of prime importance the 1970s, that procurement growth tary force which is growing but at a rate that the Reagan. administration has had slowed from 9711 percent to. 6.9 percent that is ?noi'what you would call espe- the defense number wrong for three years.. through the decade, and that the military. cially menacing:'2 percent. The administration has been on, the high burden increased _from -13-'4-percent to The estimates undercut the common side by a factor of at least two: 14-16 percent, , , conservative belief that the Soviets ex- Says who? Says the Reagan. CIA. Its - . How does one sort out the C1A-DIA ploited the- period of detente in the latest review produced startlingly lower difference? Suggests one analyst, the, 1970s, while we Americans were dimin- estimates of Soviet defense spending. JEC's Richard F. Kaufman, in a staff ishing our defense effort, and wickedly These have been duly relayed to the. study: "The DIA's estimates for Soviet forged ahead on their own. Our vigorous Joint Economic Committee of Congress, defense.and GNP have limited utility catch-up, launched by Jimmy Carter which is about to make them public... . for policymakers because they are not and intensified by Ronald Reagan, has The Soviet Union is not disarming- adjusted for. inflation,. are based on a coincided with a steady Soviet perform- not by a long shot. But while the CIA definition of Soviet defense that is dif-. ance at a relatively low level. Rather had previously estimated that. Moscow ferent from the definition of U.S. de- than using detente to gain on us, the was ;continuing io increase military fense,..and contain wide Ymargins of Soviets appear to' have used it to give spending in 1976-81 at the very strong if error.:The DIA considers' its method- themselves something of a breather. not alarmrang rate of 4-5 percent a year,,, oiogyclassified,making it difficult for Finally, Soviet defense growth of 2 per- the figure is now put at a modest 2per= outsiders to evaluate its measures." cent, for years in which overall Soviet eco- The share of the economy devoted . : - A citizen must note that the DIA works nomic growth is also now put at 2 percent, cent WASHINGTON POST 18 November 1983 Knockdown of a Soviet 'Buildup' eld Stephen S. Rosenfeld Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 LOS ANGELES TIMES 19 November 1983 DNPtGE ? CIA Estimate of Soviet Military Budget Cut ? By DAVID WOOD, Times Staff Writer WASHINGTON-The Central tween 13/c and 14%, compared to Intelligence Agency has issued a the United States' 6.5% of its GNP. reassessment of Soviet defense Although the CIA analysts did not spending that indicates that, during detail the reasons for their revised the late 1970s, it grew at only half estimate, they said the Soviet Union the rate previously estimated by the did not field as many major new Defense Department and that Sovi- weapons-including missiles, air- et production of military hardware craft and ships-in the latter part of hardly increased at all. - - the 1970s as at the beginning of the The CIA, in a . report released decade. They said the "continued Friday by the Congressional Joint slow growth" of Soviet military Economic Committee, said that on power appeared to be caused by a the basis of "new information" it combination of manufacturing bot- had revised its previous estimate tlenecks, technological problems that Soviet defense spending had and unexplained "policy decisions." risen about 4% a year between 1976 ' Since 1975, according to Pentagon and 1981. The new estimate, the figures, the Soviet Union has out- CIA said, indicates a 2% annual built the United States 2,000 to 350 increase. in ballistic missiles, 54,000 to 11,000 Furthermore, preliminary esti- in tanks and other armored vehi- mates for 1982 indicate that Soviet Iles, 6,000 to 3,000 in tactical combat n ilitary spending is still growing at aircraft, 85 to 72 in surface warships the slower rate even when mea- and 61 to 27 in attack submarines. the Sov ets also spena a muc United States "simply cannot wait greater percentage of their gross national product on defense-be- to restore our military strength- sured in constant 1970 prices, the report added. Nevertheless, according to the CLA analysis. and the Pentagon's own Soviet specialists, the level of Soviet defense spending has been so high for so long that, even with a siowd,zA-n, it is well above that of the United States. They estimate that in 1981, for example, the Soviet Union spent 45% more than the United States on both new weapons systems and on all defense activi- ties. According to the CIA analysis, h However, the CIA's new estimate differed sharply with the Penta- gon's view of the Soviet military buildup, which Defense Department officials have characterized as con- tinuing to grow at a high rate. Defense Secretary Caspar W. Weinberger repeatedly has sought to justify increases in the defense budget on the basis of similar increases in Soviet spending. Weinberger, appearing before the Senate Armed Services Committee last February to fend off proposed cuts in the budget, declared that the we must do it now, this year, in this budget. . . :' The Defense Intelligence Agency, which produces its own estimates of Soviet defense spending for the Pentagon, reportedly disagrees with the new CIA estimate. Howev- er, a.Defense Intelligence spokes- man said :Friday ' that the agency would not be ready to respond to the CIA report until next week. Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 ARTICLE APPEARED ON PAG is NEW YORK TIMES 19 November 1983 Soviet Arms Spending Said to Slow By HEDRICK SMITH Sped&l tome New York Times WASHINGTON, Nov. 18 - The Cen- tral Intelligence Agency said today that Soviet military spending, espe- cially for procurement of new weapons I systems, had grown more slowly in the last seven years than previously thought. "New information indicates that the Soviets did not field weapons as rapidly after 1976 as before," said the report released by the Joint Economic Com- mittee of Congress. "Practically all major -categories of Soviet weapons were affected - missiles, aircraft and ships." President Reagan has repeatedly said the Soviet Union is engaged in an unprecedented military buildup, but the C.I.A. study said that for the last seven years the annual growth in Soviet military spending was only half what it was in the 1966-76 period. From 1966 to 1976, it said, Moscow increased military outlays by.4 to 5 percent a year. `About 2% a Year' on Military .,Our new estimate, however, shows that like overall economic growth, the .rise in the cost of defense since 1976 has 'been slower - about 2 percent a year," the C.I.A. report said. But the agency also estimated that in Yuri V. Andropov's first year as the Soviet leader, the Soviet economy re- bounded from sluggish performances in 1981 and 1982, when the growth rate was 2 percent. This year, the report forecast growth of 3.5 to 4 percent. The Soviet economic rebound, the agency said, leaves open the question of whether the Kremlin leadership will now feel it can push Soviet military spending at faster rates. In energy production, the C.I.A. said, Moscow's "prospects for the future are considerably better than we once thought." In 1977, the agency predicted that Soviet energy production would, significantly taper off and that the Soviet Union would be an energy im- porter by 1985. No More Currency Squeeze The report issued today said Soviet natural gas, coal and oil output were all advancing. It also said Moscow had significantly recovered from a hard- currency squeeze in 1981 by holding down imports and strongly pushing pe- troleum exports. In spite of the slowdown in Soviet military spending, the study said, Mos- cow's military budget still outstrips the Pentagon budget by at least 25 percent. Nonetheless, with Congress having approved a 5 percent increase in the 1984 Pentagon budget, Senator William Proxmire, Democrat of Wisconsin, deputy chairman of the Joint Eco- nomic Committee, said the "slowdown of Soviet defense growth rates has pro- found significance that has not yet penetrated policy circles." "In one sense, the C.I.A:'s new esti. mates demonstrate that the Soviet de- fense program is very large and still growing, although at a slower rate than before," Mr. Proxmire said. "But Mos- cow has not been expanding its effort at the rapid rate that was once believed. It slowed its defense expansion begin- ning about seven years ago, a fact that the Soviets neglected to communicate and that the West failed to detect." Dispute Over Estimates Last spring Pentagon and C.I.A. spe- cialists were reported to be arguing over levels of Soviet military spending. The Pentagon estimate was that Mos- cow was proceeding as ambitiously as before, but C.I.A. officials said those estimates were overstated. Today's report indicated the agency was sticking to the more cautious view.] of Soviet spending. "The rate of growth of overall -defense costs is lower be- cause procurement of military hard- ware, the largest category of defense spending, was almost flat in 1976-to- 81, the agency study said. Prelimi- nary estimates for 1982, it added, show the same lower trend is continuing. next few years. More broadly, the study said the new slower trend in military procurement along with continuing domestic eco- nomic problems and the political suc- cession of Mr. Andropov "raise impor- tant questions about the future of the Soviet defense effort." . It suggested that the current leader- ship "may well be under pressure to speed up defense spending" but that any major effort to do so "could make it even more difficult to solve the fun- damental economic problems facing the Soviets" by forcing cutbacks in in- vestment in the civilian sector and in consumer goods. In the long run, it said, such a strat- egy could "erode the economic base of the military-industrial complex itself." Despite these competing economic pressures and priorities, the study said the Soviet economy had shown enough strength to conclude that it "is not on the verge of collapse." The study attributed the slowdown in military procurement since the late 1970's to technological problems, indus- trial bottlenecks and policy decisions. it also speculated that some money previously allocated to buying new weapons might have been diverted to research and development. Nonetheless, the agency report indi- cated that such momentum was gener- ated in the late 1960's and early 1970's that Moscow continued to accumulate large stocks of new weapons. Moscow also allocated roughly 13 to 14 percent of the total Soviet budget to military spending, roughly double the American figure.. The agency said present Soviet levels of spending were so high that. since '1975, despite "the procurement pla- teau," Soviet forces have received about 2,000 land- and sea-based inter- continental missiles, more than 5,000 tactical combat and interceptor air- craft, 15,000 tanks and substantial 'numbers of naval surface vessels and submarines. Lower Growth Rate Predicted Assessing Mr. Andropov's first year, the agency study said his economic policies had not brought much innova- tion. "Continuity has been far more pronounced than change," it said. In spite of the jump in economic growth this year, it projected a lower annual growth rate of around 2 percent in the Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B00420R000701450001-4 BALTIMORE SUN 19 November 1983 ? ? ? AR : I CLE 1ti?PEARED 021 PAGE , CIA fi Soviet ing arms spending Washington (Reuter) --The CIA neglected to communicate and that said yesterday the rate of increase in the West failed to detect." Soviet defense spending has slowed, . Mr. Reagan, in seeking congres- apparently contradicting President sional and public support for his $1.8 Reagan's frequent warnings that trillion arms program over five Moscow was embarked on an unprec- ; years, often has invoked the threat of edented arms buildup. what be called the continuing mas- In a new analysis of the Soviet sive Soviet military buildup. economy, presented to the Congres- The CIA analysis also covered the sional Joint Economic Committee state of the Soviet economy which, it September 20 and released yester- said, was not on the verge of collapse: ddav by Senator William Proxmire After two years of low growth in 1981 (D, Wis.), the CIA cut its previous esti- and 1982 the Soviet economy seemed mate of Soviet defense growth by poised for a rebound, the CIA said. more than half. "Despite its problems, the U.S.S.R. Moscow continued to increase is not on the verge of economic col- military outlays until 1976 by a lapse. The Soviet economy is the sec- strong 4 to 5 percent annually, ac- and largest in the world with a large cording to the CIA testimony. j and literate population, a huge indus- "Our new estimate, however, trial plant and an enormous endow- shows that like overall economic merit of natural resources," it said. growth, the rise in the cost of defense The CIA predicted 1983 economic since 1976 has been slower - about 2 growth based on statistics from- the percent a year," CIA analysts said. first seven months at 3.5 to 4.0 per- The CIA found that a slowdown in cent of gross national product, com- producing military hardware, the pared with 2.0 percent in 1981 and 1982. largest category of Soviet defense But growth then would slow to an spending, accounted for most of the annual rate of 2.0 percent, it added. .drop. It gave no explanation for the The CIA also revised Soviet oil policy change. prospects, saying they were not as The Central Intelligence Agency bleak as it estimated in 1977, when reported that its preliminary data for some analysts forecast the Soviet 1982 indicated the slowing'trend was Union would become a net importer continuing but added that, despite of oily 1985. lagging growth, Soviet defense activi- Although production was leveling ties exceeded those of the United States "by a large margin., off, the prospects now were consider- The Pentagon's Defense Intelli- ably better than once thought, ac- gence Agency disputes the new CIA cording to the CIA testimony. _ Assessing new leader Yuri V. An- figures, reporting that there has been dropov's performance in office, the no slowdown in total Soviet defense CIA said basic Soviet policies had not spending in the 1970s, according to altered since the death of Leonid published reports. Brezhnev. Mr. Proxmire said the CIA analy- "Continuity has been far more pro- sis had a profound significance that nounced than change," the agency's had not yet penetrated policy circles, analysts said. Noting that Soviet defense spend- ing remained large and growing, he said, "Moscow has not been expand- ling its effort at the rapid rate that was once believed, a fact the Soviets Approved For Release 2009/10/06: CIA-RDP86B00420R000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 ? is ARTICLE APPEARED ON PAGE WASHINGTON POST 20 November 1983 Soviets Seen Slowing Face of Arpiing United Prr_a lnternMlonal A new CIA report on the Soviet economy indicates that defense costs have risen at a slower rate than pre- viously thought, although the Soviet's commitment to the military still far outstrips U.S. outlays. "New information indicates that the Soviets did not field weapons as rap- idly after 1976 as before," said the re- port released Friday by the congres- sional Joint Economic Committee. . Sen. W Liam Proxmire (D-Wis.), subcommittee vice chairman, said the slowdown of Soviet defense growth rates 'has profound significance that has not yet penetrated policy circles.' "In one sense, the CIA's new esti- mates demonstrate that the Soviet defense program is very large and still growing, although at a slower rate than before," Proxmire said. "But Moscow has not been expand- ing its effort at the rapid rate that was once believed. It slowed its defense expansion beginning about seven years ago, a fact the Soviets neglected to communicate and that the West failed to detect" The study was prepared by CIA's Office of " Soviet Analysis and was presented to Proxmire's subcommittee by Robert Gates, deputy director for intelligence, during closed hearings in September. "In one sense, the CIA's new estimates demonstrate that the Soviet defense program is very large and still growing," .Sen. William Proxmire, above, said. The report said Soviet defense spending in constant 1970 ruble prices continues to increase. "However, the new evidence incor. porated in our present estimate indi- cates that in at least one major area, the procurement of military hardware, Soviet expenditures have leveled off since 1976." "Our net' estimate ... shows that like overall economic growth the rise in the total cost of defense since 1976 has been slower-about 2 percent a year," a lower rate than before largely because the growth rate for procure- ment `was almost flat in 1976-81." Practically all major categories of Soviet weapons were affected- missiles, aircraft and ships, the CIA said, adding that the trend was only partially offset by the tendency of newer, more sophisticated weapons to cost more. The CIA report stressed that trends in Soviet military spending "are not a sufficient basis to form judgments about Soviet military capabilities, which are a complex function of weap- ons stocks, doctrine, training, gener- alship and other factors. "Moreover, the spending estimates. do not give an appreciation of the large stocks of strategic and conven- tional weapon systems already de- ployed," it said. Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 ARTI CLE APPEARED ON PAGE ? NEW YORK TIMES 20 IlIover ber 1983 WASHINGTON OOKING back 50 years to when President Franklin D. Roosevelt opened diplomatic relations with Stalin's Russia, George F. Kerman recalled last week that the two nations "rubbed each other tion proposed a ceiling of 420 missile warheat:s, down from the planned American level of 572. Moscow hinted at a cut in its triple-headed SS-20 missiles aimed at Eu. rope from 243 to 120 (with 117 more for Asia), but leaving the United States at zero. The White House dismissed this as unfair. A breakdown in the arms talks seemed all but inevi. table. And elsewhere, the two nuclear giants were jab- bing at each other through proxies in Central America and Lebanon. The Kremlin, which has long favored ac- ceptance of spheres of influence in a superpower's home region, has kept its forces away from El Salvador and Nicaragua. But in volatile Lebanon, each side has troops at the fringes of a power vacuum reminiscent of the Bal- kan tinderbox that produced World War I. Some 7,000 Soviet advisers manning missile sites in Syria are only about 60 miles from 1,800 American marines in Beirut. At another level of unpleasantness, Congress last week extended Presidential powers to restrict exports for security reasons to Feb. 29. The United States also re- vised its list of places Russian diplomats and journalists may not visit - about 20 percent of the country - recip- rocating for Soviet travel restrictions. A troubling new factor is the uncertainty caused by the three-month absence of Yuri V. Andropov, the Soviet leader. American experts believe he is seriously ill and thus politically handicapped. The Reagan Administra- tion anticipates a Soviet standpat hard line because, as a high American official said, "There's nobody at home over there to make a deal with." As Kremlin maneuver- ing for succession begins, others add, candidates are likely to bid for favor by holding to a tough line. . Adding to the White House menu of worries is the political shock expected tonight from ABC's television movie "The Day After," exploring the thermonuclear nightmare. Richard B. Wirthlin, President Reagan's polltaker, predicted "a very strong impact." American Wariness The escalation of tensions and public anxiety were predictable, however. The struggle over missile deploy- ment was set into motion by NATO's decision four years ago to match Moscow's buildup of SS-20 missiles with American missiles unless the Russians accepted parity of nuclear missile forces in Europe. But the current chill acquired its ominous edge from the cold distance and re- ciprocal mistrust between Moscow and Washington in the Reagan-Andropov era. After fencing for two years, the two sides began a diplomatic effort last summer to bridge the gulf. That effort crashed along with the South Korean airliner shot down by Soviet fighters in August. The incident left behind a residue of new American ap- prehension about Soviet intentions and Russian doubts about the prospects of striking any agreements with a President who sees Moscow as "the focus of evil in the modern world." The dangers, however, should not be overstated. They do not compare with the nuclear showdown over Cuba in 1962 or earlier confrontations over Berlin. For all of today's tensions, the new Soviet-American five-year grain agreement stands. Washington has lifted some sanctions against Poland and has allowed a few commer- cial deals. Each capital carefully avoids challenging the other militarily. "We're not close to war," said Richard Burt, the Assistant Secretary of State for European Af- fairs. "Even if the Soviets walk out of the arms talks, they'll be back after awhile." Perhaps. The implication is that each side has an interest in not letting current ten- sions get out of control, for the risk of miscalculation is high at a time when the margin of restraint is extremely thin. painfully in many ways." Their ideological competition then was "far more intense than today," he said, and political tensions were "no smaller." But he added the sweeping verdict that the problems half a century ago were modest beside today's nuclear anxieties. "What we did not anticipate was anything resembling military con. flict between our two countries," the renowned scholar and diplomat said. "It is weapons we now talk about, weapons we read about, weapons we negotiate about. Be- hind this endless debate about weaponry the real political issues between the two countries fade into obscurity." Trapped in the nuclear competition, he said, the super- powers "are simply writhing helplessly at immense dan- ger to themselves and to the world around them." Whether or not this assessment overstates the dan- gers, it captures the chronic worry in the West about the dangerous drift and icy distrust in superpower relations. Imbedded in the public mood is a strain of dark pessi- mism and dismay that the logic of events may be drag- ging the world toward unspeakable disaster. The immediate targets of concern last week were the American nuclear-tipped cruise missiles in Britain. They were greeted by howls of protest in the House of Com- mons and by angry demonstrators outside the air base at Greenham Common where they were unloaded. The drama may be re-enacted in Italy when the cruise ar- rives there and in West Germany when deployment of Pershing 2 missiles is to begin next month. For all the furor, Britain's Conservative Government had won Par- liamentary approval of the deployment this month; the Italian Chamber of Deputies followed suit last week. The climactic test comes tomorrow in the Bundestag in Bonn,' where Chancellor Helmut Kohl is determined to proceed despite mounting opposition from the Social Democrats. `Campaign of Fear' The Pershings have generated the sharpest contro- versy. Moscow contends their nine-minute flight time to Soviet soil will shorten the fuse of nuclear.war and may force a counterstrategy of launching Russian missiles on warning of attack. But some American experts believe the cruise, once let loose, may be an even more danger- ous genie. It is small, highly mobile, easily hidden and thus virtually immune to arms control. Proliferation of cruise missiles could spur a new arms spiral like the one touched off by multiple-warhead intercontinental mis- siles in the 1970's, a decade ridden by controversy over which side led in the arms race.-(The-Central Intent-, genre Agency last week scaled down.its estimate of Soviet military spending in the late 70's. It said the Rus- sian defense budget had risen by 2 percent a year since 1976 - half the groom rate the previous decade, al- though still outstripping comparable Pentagon budgets.) in what the Reagan ministration called a "cam- paign of fear" aimed at getting the West to ployrnent, the Russians have threatened to walk out of the intermediate-range arms talks when the American missiles are in place. Last week, Soviet Defense Minister Dmitri F. Ustinov tightened that screw with a strident at- tack on the West, warning that Washington would feel the consequences of deployment. Both sides floated new proposals at Geneva aimed more at looking flexible, it seemed, than at striking a deal. The Reagan Administra- Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Afl'"'1, r. CHICAGO TRIBUNE 20 November 1983 By James Coates White House spokesman Larry months of 1983, we estimate that Speakes -said the administration GNP [gross national product, the Chicago Tribune, would have no comment on the re- output of a nation's goods and servic- WASHINGTON-The CIA has low-,rt until after it is released official- es) will rise by 33 to 4 percent, well ered its estimate of Soviet defense ly this week. above the approximately 2 percent spending and brightened its 1983 The CIA analysts who wrote the growth achieved in both 1981 and forecast for the Russian economy report alluded to 1982. ..." possible questions The CIA disclosed that Andropov after analysts noted that Kremlin about whether the U.S. had over- moved dramatically to implement leaders are spending less for stated the Soviet threat but empha- reforms, divert economic activityy weaponry than had been thought. sized that the Soviet build-up is nev- away from defense and into the civil- The CIA, in a report for the Con- ertheless substantial. fan economy and to arrest high-level gressional Joint Economic Com "Our latest comparisons of U.S. officials snd blue-collar workers for mittees, said that while it had pre- and Soviet defense programs show corruption and malingering. d i c t e d that Soviet weapons that despite somewhat slower growth 'THE NEW REGIME has shown procurement would increase by 4 in recent years, the cost of Soviet f concern for the welfare of the pu percent to 5 percent per year in the defense activities still exceed those concern in a variety re of the the 1980s, it actually has "flattened out" of the United States by a large mar- -at only 2 percent a year. gin," the report said. report noted. "First, a flurry of de- "The revised defense estimates Despite the "flattening out," the crees has been published this year show that the . total cost of defense CIA said, the Soviets continue to callin for improvements in the level . since 1976 has risen by only 2 percent build their massive arsenal. In- of daily services and in the supply of a year," said Sen. William Proxmire deed, current levels of spending are consumer goods provided the popula- [D., Wis.], who released the report so high that despite the procurement ti "A by the CIA's Office of Soviet Analy- plateau noted, the Soviet forces have The report said, for example: sis. "The slowdown in the growth received since 1975 about 2,000 oint Central Committee-Council of rate is due to the leveling off of ICBMs and SLBMs [Submarine Ministers resolution was published in military procurement since 1976." Launched Ballistic Missiles], over March rs rch calling for an expansion of clearing The report attributed i m - 5,000 tactical combat and interceptor the number of repair and clean such provements in Soviet economic con- aircraft, 15,000 tanks and substantial shops, hairdressing, more sirdressin,film personal developing and ditions to better weather conditions numbers of major surface comba- mnd cs; and than had been anticipated, the dis- tans, SSBNs [missile submarines) the consumer durables; covery of energy resources and a and attack submarines." the rental of onet workinh establishment hours of in more the service quiet shift downward in the massive Proxmire, one of the Senate's rep- sector. defense spending that had severely resentatives to the Joint economic This "resolution" was followed, drained the economy during much of committee, said the Russian leader- the CIA said, by "unusually blunt the last decade. ship began decreasing defense ex- pansion rates in 1976 but kept the warnings I to consumer ministries " The report also credited major policy secret. "The slowdown of So- 'shape up." fanning out in the crackdowns by Soviet President Yuri' viet defense growth rates has pro- WITH to knock on fanning doors of Andropov, formerly head of the KGB found significance that has not yet countn, miss work on th the and with police agency, for increasing effi- penetrated policy circles," he said. those ho e w who a miss tanks, planes th military getting ciency among farm, factory and go- The report's biggest surprise is vernment workers. that the Soviets tapered off military and guided missiles than the CIA THE ASSUMPTIONS in the report _spending apparently to boost civilian had forecast, nature also helped the appeared to question the Reagan ad morale and improve the overall economic upturn. ministration's rationale for a drastic economy.-.___. Better weather followed a ruinous increase in defense spending over Drawing on information from, drought in 1980-81 and new oil fields the next decade: that the Soviets are sources as diverse as regional news- J and coal deposits were discovered in rapidly' building up their forces and paper stories published in Siberia Siberia, forcing the CIA to reverse that the U.S. must match the Soviet and CIA-paid spies in the Soviet ? its prediction that the Soviet pace. bureaucracy, the report provides a economy would stagnate as energy President Reagan repeatedly has rare glimpse of what the U.S. intelli- supplies tapered off in the mid-1980s. described Soviet milita exansion gence community has concluded The CIA observed: "The Soviet as massive. His administration has about the short reign of Andropov, economy is the second largest in the . called for a five-year defense build- who now appears to be seriously ill. world, with a large and literate Andropov replaced the late Leonid population, a huge industrial plant up that would cost $1.9 trillion, an Brezhnev slightly more than a year and an enormous endowment of nat- average 10 percent increase, ad- ural resources." justed for inflation. ago, on Nov. 12, 1982._- "THIS YEAR some of the econom- "My own view of the Soviet Reagan's critics have urged that is pressures on the Andropov leader- economy," Proxmire said, "is that he scale back his defense-spending ship should ease slightly,' the report we in the West tend to magnify its demands to help avoid the massive said. "After two years of-low growth weaknesses and to overlook its budget deficits predicted for the next in 1981 and 1982, the economy seems strengths." several years. Reagan, however. -;c .A Pnr rahrn,nA Racotj nn steadfastly Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 L- - Approved For Release 2009/10/06: CIA-RDP86B00420R000701450001-4 ? ? ? Dip reported. in Soviet rate of spending Los Angeles Times WASHINGTON - Contrary to Pentagon as- sertions. the growth rate in Soviet defense spending declined in the late 1970s and Soviet production of military hardware barely grew at all. according to an assessment by the Central Intelligence Agency. The CIA, in a report released Friday by the Congressional Joint Economic Committee, said that on the basis of "new information," it had revised its previous estimate that Soviet defense spending rose about 4 percent a year between 1976 and 1981. The new estimate, the CIA said, indicates a 2 percent annual increase. Furthermore, preliminary estimates for 1982 indicate that Soviet military spending is still growing at the slower rate even when measured in constant 1970 prices, the report added. Although the CIA analysts did not detail the reasons for their revised estimate. they said that the Soviet Union did not field as many major new weapons, including missiles, aircraft and ships, in the latter part of the 1970s as during the beginning of the decade. They said that the "continued slow growth" of Soviet military power appeared to be caused by a combination of manufacturing bottle- necks, technological problems and unexplained "policy decisions." Nevertheless, according to the CIA analysis and the Pentagon's own Soviet specialists, the level of Soviet defense spending has been so high for so long that even with a slowdown. It is well above that of the United States. In 1981, for example, the dollar cost of all So- viet defense activities was 45 percent greater than US outlays, and the Soviets spent 45 per- cent more on producing new weapons systems than did the Americans. Approved For Release 2009/10/06: CIA-RDP86B00420R000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 REUTERS 21 November 1983 WASHINGTON 'EAPONS CAROL GIACOMO The Pentagon agreed with the Central Intelligence Agency today that the rate at which the Soviet Union is adding new weapons to its military arsenal has virtually flattened out since 1976. Senior intelligence officials from the Defense Department and the CIA cited a number of possible causes for this trend, including a Soviet decision to adhere to numerical limits imposed by the unratified SALT-2 arms control treaty. "In the aggregate what we find, using the dollar index, is that the rate of procurement has fallen to a point where it is fairly flat," said a CIA official. His Defense Department counterpart added: "Production on many models has declined. Quantities are going down on aircraft frames and tanks." The two briefed reporters on condition they not be identified. The two agencies emphasized their consensus on the state of Soviet weapons procurement, the largest chunk of the defense budget, and downplayed differences on total Soviet defense spending, attributing them to accounting variables. The CIA computed overall annual growth in Soviet defense spending from 1976 0 0 1981 at 2 per cent, while the Pentagon pegged it at 6 to 7 per cent. The CIA official said his agency calculated growth in rubles not , dollars, and suggested that when this difference is factored in, the variation between the two agencies amounted to only about 1 or 2 per cent. The growth rate of the, Soviet defense budget, calculated by U.S. intelligence officials by amassing and extrapolating wide-ranging data, has political implications in the United States. President Reagan has justified his massive arms program by arguing that Moscow is engaged in an unprecedented buildup and is committing far more to defense than the United States. One intelligence official advised against drawing too broad a conclusion from their briefing comments, which expanded on a CIA report prepared for Congress and made public last week. The data "tells you something about how fast (Soviet) resources are flowing into the (military) inventory" but does not in itself measure the quality of Soviet defense, which also depends on training, troop morale and other factors, he said. The official noted that the rate of Soviet weapons procurement flattened out once before, in the late 1950s-early 19605, and rebounded with great vigor in 4W he mid-1960s. Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Z. He added: "There is every reason to believe that when they can, (the Soviets) will attempt to return to the dynamism in their military program they exhibited in the 1970s." All signs suggest the Soviets have more weapons systems now in the research and development stage than they did in either of the past two decades, this official said. The officials admitted they did not know which causes behind the Soviet procurement slowdown were most significant. "There is clearly an-array of pressures that caused this, in addition to some choices," one said. He declined to discuss Soviet adherence to the SALT-2 treaty at any length, saying only that "there were some high-priced weapons systems which got a numerical cap out of the arms control agreement." Within those limits, however, the Soviets have modernized some systems considerably, he said. 10 Other reasons cited were Soviet concern over the cost of new weapons, technical delays, and transportation problems. Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 CHRISTIAN SCIENCE MONITOR 21 November 1983 Soviet two-step on arms control hinds at Kre~ilin disarray By Gary Thatcher Staff writer o' The Christian Science Monitor ? ? Ustinov: denies Geneva change Moscow The curious case of the latest Soviet arms control offer - made informally in Geneva, then de- nied loudly in Mos- cow - suggests the Kremlin may itself be in some disarray over how to re- spond to NATO's new missile deployments. Many Western analysts had expected a last-minute move by the Soviets to try to prevent the NATO deployment. They had suggested Moscow might come up with some apparent con- cessions at the arms talks in Geneva. But, when it came, the Soviet two-step - one forward, one backward - caused more perplexity than clarity and cast fur-. ther doubts on who is calling the shots in the Kremlin. With Soviet leader Yuri Andropov ab- sent, - apparently ill, Western diplomats are wondering whether others are direct- ing Moscow's moves at the negotiations in his stead. Some analysts argue that while some Kremlin civilian officials might want to be flexible at Geneva, others - notably Soviet military hard-liners - are resisting such moves. Some observers say the world is prob- ably seeing the outward signs of an inter- nal struggle between would-be successors to Andropov, who has not been seen by Westerners for three months. First word of the new Soviet arms con- trol offer in Geneva came from West Ger- man Chancellor Helmut Kohl. Late last week he said the Soviet chief negotiator at the Euromissile talks in Geneva had hinted that Moscow might drop its de- mand that British and French nuclear deterrents be included in the negotiations. This appeared at first sight to be a So- viet concession, even though it was part of a proposal that called for zero NATO de- ployment in return for a halving rather than elimination of Moscow's SS-20 mis- siles targeted on West Europe. Since negotiations over intermediate- range nuclear missiles in Europe began in Geneva two years ago, the Soviets have insisted that the nuclear forces of Britain and France should be included in the total of NATO missiles "in Europe. American negotiators have refused, arguing the British and French arsenals are indepen- dent and not subject to NATO's control. This has been a major sticking point in the negotiations. I 'Washington, White House spokes- man Larry Speakes confirmed the Soviet offer but termed it "unfair." The reason? It would still, according to the White House, be conditional on the US deploying no new missiles in Europe. That, according to the Reagan- adminis- tration, would preserve the USSR's mo- nopoly on medium-range missiles on the continent. The Soviets currently have 243 triple-warhead SS-20 missiles aimed at Europe and 117 in the Soviet Far East. But late Friday, the Kremlin denied any change in its negotiating stance. The Soviet. news agency Tass distributed a preview of a statement by Defense Minis- ter Dmitri Ustinov in Saturday's Commu-.. nist Party daily, Pravda. In it, he re- _ peated demands that French and British missiles be taken into account. The official Soviet news agency Tass denied the Soviets had given any "sig- nals" of flexibility in Geneva. There were "no such signals," Tass said, and there "are not to be. Some Western analysts read this as the Kremlin disowning the stance taken by its Geneva negotiator, Yuli Kvitsinsky. That reminded them of the 1982 "walk in the woods." During that walk, US and Soviet chief negotiators apparently worked out a potential compromise on missile deploy- ments, involving reductions by both sides. The offer was quickly disavowed by Moscow, then in effect by Washington.. role NUED Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B00420R000701450001-4 ? ? is The apparently conflicting signals from the Kremlin are mirrored, in some measure, in the East bloc as a whole. The Soviets have vowed to retaliate for the new missiles by new Soviet deployments in East Germany and Czechoslovakia. Czechoslovak Prime Minister Lubomir Strougal warned West Germany of "unforeseeable consequences" arising from the-deployment. Romanian Presi- dent Nicolae Ceausescu, an East-bloc maverick, says both superpowers are "de- fying mankind" with new deployments and counterdeployments. Last week, a Soviet official, asked to respond to Ceausescu, replied tersely, No comment. A Soviet official says the USSR is re- viewing its own nuclear weapons policy. The debate is much quieter and largely held behind-the-scenes, he says. Some in- dicator of how it is going may come this week, since the Soviets have threatened to walk out of the negotiations in Geneva once they become "pointless." . That has widely been interpreted to mean when the West German Bundestag this week reaffirms, as expected, the gov- ernment's decision to deploy the missiles. Still, there are some hints that the So- viets may stay on even longer in Geneva, until the NATO missiles are actually operational - sometime in December. And both Western diplomats and So- viet sources indicate that a walkout will probably not be permanent. The Soviets could return at some later date, or could offer to include- the Euro- pear range missiles in the strategic arms reduction talks (START), which are also under way in Geneva. In Washington, meanwhile, Congress has passed a record 5249.8 billion defense. bill, clearing the way for continued buildup of both US conventional and nu- clear military power. At the same time, the US Central Intel- ligence Agency, in something of an about- face, lowered its estimate of the annual growth of Soviet military spending growth. Since 1976. the IA renortS Soviet mil,terv s ending has crown by only about 2 percent a year - half the rate of earlier CIA estimates, St;l- the CIA study warns the Soviets spend more for defense than the US "bv a largp, margin-', Approved For Release 2009/10/06: CIA-RDP86B00420R000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 P~ T1 ? 1WALL STREET JOURNAL 21 November 1983 CIA Cuts Soviet Defense-Budget Estimate, Cites `Leveling Off' in Weapons Building By GFY u.n F. SEIB Staff Reporter of THE WALL STRE#T JOURNAL WASHINGTON-The Central Intelligence Agency reduced its estimates of the rate of Soviet weapons construction, a change that will bolster those who say President Rea- gan's defense budget is too large. According to the agency's latest analysis of the Soviet economy, Soviet expenditures on procurement of military hardware have "leveled off" since 1976. The report says the annual increase in overall defense spending has been about 2% a year since 1976, down from an annual rate of 4% to 5% in the pre- ceding decade. Previously, U.S. officials estimated that Soviet defense spending continued to in- crease at roughly 4% to 5% annually. "The rate of growth of overall defense costs is lower because procurement of mili- tary hardware-the largest category of de- fense spending-was almost flat in 1978.81," the report summariies. "New information indicates that the Soviets didn't field weap- ons as rapidly after 1976 as before." The estimates on defense spending are in a CIA report to Congress's Joint Economic Committee. The report, which the commit- tee released over the weekend, paints a ros- ier picture of prospects for the Soviet econ- omy, particularly its energy sector, than some earlier reports. In part, the report says, Soviet weapons procurement has leveled off because the newer, more sophisticated weapons are more expensive. In addition, it says, areas such as operations and maintenance have taken up more of the defense budget. Agency analysts stress in the report, though, that Soviet defense spending con- tinues to increase and still exceeds U.S. out- lays. In 1981, the cost of Soviet defense ac- tivities was at least 25% higher than defense expenditures in the U.S. that year, the re- port asserts. Congress has appropriated $249 billion for defense for fiscal 1984. Sen. William Proxmire (D., Wis.), who released the report, said the revised esti- mate of Soviet defense spending "has pro- found significance that hasn't yet penetrated policy circles" in the U.S. In general, the report notes that the So- viet economy was "sluggish" in 1981 and 1982, when its average annual growth rate was less than 2.5%. But the report goes on to note that the Soviets cut markedly into their hard-currency trade deficit in 1982 by push- ing oil exports and holding down imports. In 1983, the report says, the Soviet econ- omy "seems poised for a rebound." The CIA's analysts estimate that Soviet gross na- tional product will grow 3.5% to 4% this year and that farming, in particular, probably will rebound strongly. The CIA also said Soviet energy pros- pects "are considerably better than we once thought." The Soviets have avoided the downturn in oil production once predicted by the CIA. The agency's new report estimates that oil production will hold roughly steady through the mid-1980s, then fall in the 1990s. Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 ABC WORLD NEWS TONIGHT 21 November 1983 SR/WEAPONS JENNINGS: The U.S. intelligence community has come to some new conclusions about the a t hi p ce a w ch the Soviet union is modernizing its military. As ABC's John McWethy reports from' Washington, the latest assessments are something of a'.surprise. MCWETHY: According to the U.S. intelligence community, the production of Soviet weapons turns out to be slower than ? previously advertised, particularly in production of new strategic nuclear weapons, things like missiles and missile-firing submarines. In a report to Congress, the CIA claims that since 1976, the growth rate of expenditures on new weapons has been zero. In other words, since the mid-1970s the number of tanks, ships, missiles, and aircraft rolling off the assembly lines has been the same year after year not steadily increasing as often claimed by the Reagan adminstration. Intelligence officials cite three possible reasons for why the purpose and production of weapons has slowed. One, the troubled Soviet economy cannot meet the military's demands for raw materials and weapons components; two, the Russians are buying more and more sophisticated weapons and are finding, just as the U.S. has, that these cost more, take longer to produce, and can only be afforded in smaller numbers; three, there may have been decisions in the Kremlin to slow the growth rate of new weapons, but no one knows why. Despite the new analysis, Reagan administration officials say the Soviets still far outspend the U.S. on weapons, and there should be no change in the president's five-year, $2 trillion plan to modernize America's military. John McWethy, ABC News, the Pentagon. Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 ARTICLE APT ~ D 0 ca" PgQ~-- 7 WASHINGTON POST 22 November 1983 Soviets Reported Slowing Rate of Military Buying ? S By Fred Hiatt Washington Post Staff Writer Since 1976. the Soviet Union has slowed the rate at which it procures tanks" airplanes and other military equipment rather than accelerating defense spending as the Reagan administration has suggested, senior intelligence officials said yes- terday. The officials, who spoke on condition that they not be identified, said the CIA believes that Soviet defense budgets stayed even or increased only slightly from 1976 through .1982, the last year-for', which reliable information is available. Fewer planes and tanks were purchased, as the Soviets joined the United States in discovering that increasingly complex military technology strains budgets. the officials said. The Reagan administration has sought to jus-. tify large U.S. defense spending increases' by claiming that the Soviets have engaged in an un- precedented military buildup. The CIA estimate differs marginally from the assessment of Pentagon intelligence officers, who agree on the trend in equipment produced but say they believe that Soviet expenditures have grown. The senior intelligence officials said their anal- ysis does not contradict President Reagan's posi. tion because, even without growth, the Soviet de- fense budget remains 25 to 45 percent higher than U.S. spending. They also. stressed that military spending does not measure "combat effectiveness," which de- pends on many factors. "This has no implication' for the U.S. defense budget, as far as I'm concerned," one analyst said. The officials said that not since the early 1960s had Soviet defense spending slowed as noticeably as since 1976. The officials said they do not be- lieve that the trend reflected several years of U.S.- Soviet detente preceding the current plateau or a deliberate decision to restrain spending. Instead, they attributed the slowdown to weap- ons-testing problems and delays, a "policy-deci- sion" to adhere to weapons limits set in the SALT I and II arms-control talks and general economic problems involving transportation and basic-ma- terial production. While insisting that. world events had no impact on the slowdown, the officials said a Soviet view of increasing world tension may prompt increased military spending. They said the Soviets are developing more weapons systems than ever and have "expanded the bases of production." A decision to increase defense spending would force the Soviets to abandon plans for decreasing their citizens' cost of living, they said. The Reagan administration increased the de-, fense budget during its first year by about 12 per- cent in "real," after-inflation growth. That budget grew by about 7 percent last year and less than 4 percent, this year, and the Pentagon has drafted a preliminary request for 17 percent real growth next year. U.S. officials say real growth in Soviet defense spending averaged between zero and 3 percent from 1976-82. The range reflects departmental disagreements on how to calculate Soviet inflation and money exchange rates. Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 ? 1ARTICLE AP ON PAAGE, WASHINGTON TIMES 22 November 1983 Soviet arms spending.: Read the fine print ? Oh, dear. Defense slashers will love this: A CIA analysis of the Soviet economy esti- mates Kremlin expenditures for new mili- tary hardware have "leveled off" since 1976, and overall defense spending has slipped roughly 2 percent a year over the same period. If accurate, that would repre- sent a 4-to-S percent reduction from the prior decade. Before anyone starts beating the drums for a reversal in U.S. defense spending, we suggest reading the coda to the intelligence agency's report. CIA analysts stress that Soviet defense spending continues to rise as a percentage of GNP and to exceed U.S. outlays in real dollars - 25 percent higher than ours in "81, or at least $220 billion compared to Washington's 5183.7 billion. Further, by "leveling off" the CIA means ? Defense Minister Dimitri Ustinov's share of the Soviet GNP remains unchanged at 13.14 percent. Look at it this way: In'81, our defense share of GNP was 5.4 percent. Under Mr. Carter, it barely averaged S percent. Even Mr. Reagan's accelerated effort has nudged it up to only 6.5 percent. In any case, it's easier to get Mr. Andro- pov to attend midnight mass than to get precise numbers on Soviet military spending. The figures are hidden under innocuous categories and sprinkled throughout the huge Soviet bureaucracy. Funds for the Kremlin's ambitious long- range missile program, for example, are allocated under the budget for the Ministry of Heavy Industry. So the CIA report is,at best an estimate. But you can bet simple and wrongheaded interpretations of it will abound. No matter. It'd be foolish verging on suicidal to rear- range U.S. defense priorities on the basis of -with all due respect to the agency - what amounts to an educated guess. Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B00420R000701450001-4 ? ? ARTI CLE ON PAGE WASHINGTON POST 23 November 1983 inberger 1 ~iTOtes G ? ains In Strength .By Fred Hiatt tiun for nucl ear w d tion rates have been lower than held steady between 1976 and 198 The . Pentagon said. the budget projected b g isca year, ut of cardboard" to $60. billion defense budget, about . $11 he left some'roori for retreat from 9uestioned about recent CIA es- billion short of the administratinn'a p m, e man dis- . v"?""' ""` more than $5 billion this year. Defense Secretary Caspar W. "It's not an arms racey played for the cameras a screwdriver Weinberger said yesterday that the ger said: 'What we're. engaging ine is charging t eeNa aI Electric. has been Reagan administration , has - made ', . an 'attempt to.. regain deterrent for a bombardie s scope on an A6` "substantial improvements" in 'U.S. strength" . military strength, attack plane-"this little piece of but he criticized :The administration last summer, plastic," Lehman said-for. which Congress-- for--dragging- its feet on projected a defense budget of $321.5 Grumman was charging $1,800. The _- funding the- president's full buildup. . billion for: frscal 1985. 'W'einberger _ somewhat unusual screwdriver' i Before leaving town _-last week; yesterday declined- to discuss:- his down to $45, he said, and the 'piece'. Congress approved -,a record $250 hones for the cumin f - 1 Welnbeceer said the United States represents only 3 'percent "real" ari, Navy Secretary John -F.--Lehman nonetheless cannot relax its efforts rual. growth-after inflation-come Jr. also herd g news conference yes. to increase its military strength. pared with the 7 percent sought .by terday.. to, claim cost savings ,in. con- "The. fact.that there is an enor- President Reagan, and Weinberger tracts and'spare-parts purchases: mossly lac a amount ofmone ying 1 1, said congressional refusal , the '..Lehman said, the Navy: recently - spent by the Soviets for-their mil- administration's full request will end awarded.. $5.9 billion in contracts, i machine each year is not dis- up costing more. spending money :appropriated by -puted and ".-the' .-the' fact` that it's a "We have a situation in which Congress just last week, and saved great deal more than we're investing what we need, what's been author- $480 million compared with earlier is not disputed," he said. "We don't ized, what- we will have to have, will Navy budget ,estimates. ? think we are in a situation where we cost us more and will take us a little Lehman, who jawboned'McDon- can in any sense slow down the re-. longer to acquire," Weinberger told a Hell Douglasilast year to lower the gaining of our military strength" Pentagon news conference. . - cost of F/A18 fighter jets, attributed - . Weinberger noted with satisfac. The Defense Department budget the lower costs to the 'Pentagon's tion that Congress has funded every has more than doubled from fiscal . increased emphasis on competition weapons system requested by Rea- 1979, when it totaled $121 billion, to in procurement. the fiscal 1984 budget of slightly less But he-said spare and repair parts gan Butc he saide stretching out the than $250 billion. ._ , continue -to be purchased mostly on procurement time and, in particular, Neither total includes the military a "sole-source"- basis and to cost refusing to approve multiyear con- construction bill, which this year ap- more than they should. tracts will increase the ultimate cost propriated more-than $7 billion, or ..To -illustrate that point, and de- of the buildup by. hundreds of mil- the Energy Department appropria- monstrate the Navy's commitment lions of dollars. Approved For Release 2009/10/06: CIA-RDP86B00420R000701450001-4 eapons pro uction, to solve the roble L h Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 ARTICLE APp ON PAGE ? NEW YORK TIMES 23 November 1983 iEINBER(IER LINKS neth W. m,said on Oct. 30 that I and taliation c comes in many shapes es and sizes, and we are looking at all of the options." More recently, however, Sec SYRIA TO BUM BING retary of State George P. Shultz said 1 O public talk of retaliation should cease. He Says Damascus Sponsored Iranians in Beirut Attack Won't Discount Nicaragua Attack On other matters today, the Defense Secretary left open the possibility that the United States would use military force against the leftist Government of Nicaragua. But he insisted that Ameri- can combat troops would not be sent to El Salvador despite a deterioration in By RICHARD HALLORAN the military situation there. ap emzne;Newy knum. I:- He said relations with the Soviet WASHINGTON; idov. 22 Union "are not good" for many rea- af Defense y sons. Pa? Weinberger said "I don't think they're irretrievable," 3' that Iranians who ea- 4 he said, but I think that it will require ploded the truck bomb in the Marine a substantial alteration in Soviet month ago, with the "sponsorship and knowledge and authority of the Syrian i Government." Mr. Weinberger, who spoke in a news { conference, did not disclose the source 1 of his information but pointed a finger directly at the Syrian Government in what appeared to be the strongest pub- lic accusation by the Administration on who was responsible for the attack in which 239 Americans died on Oct. 23. ! But Mr. Weinberger declined, in re- sponse to a question, to call it an act of war. The Defense Secretary said the evi-. dence of the Iranian and Syrian connect tion "is an accumulation of a -number of reports in which we have consider- able confidence." He brushed off questions of reprisals, saying President Reagan had not made "any promise of retaliation.". On Oct. 24, the day after the bomb- ing;'Mr. Reagan said, "This despicable act will not go unpunished." In a tele- vised speech three days later, he said, "Those who directed this atrocity must be dealt justice, and they will be." ; The Deputy Secretary of State, ken. behavior." Mr. Weinberger appeared to soften his insistence that the Reagan Admin- istration submit to Congress a 1985 military budget that would be 20 per-, cent higher than the present budget.] Thenew budget is due to go to Congress in January. Mr. Weinberger further asserted that lower rates of Soviet military in- vestment reported by the Central Intel- ience and Defense Intelligance Agen- d es shoul not slow down United c ates efforts to expand miliry form. Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 ? ARTICLE AYY~h.AK h?UI ON PAGE _ -_ 1 __ ii oC7 WASHINGTON POST 23 November 1983 LETTERS TO THE EDITOR `Knockdown of a Soviet Buildup' Usually when CIA analysis is reported inaccurately, we must suffer in silence. However, in the case of Stephen S. Rosenfeld's Nov. 18 column, "Knock- down of a Soviet Buildup," because we prepared an unclassified version of our work on trends in Soviet defense spend- jog for the Joint Economic Committee of the Congress. I am able to put in proper perspective Mr. Rosenfeld's ac- count of our analysis. He suggests that our analysis of the Soviet defense effort portrays "a steady Soviet performance at a relatively low level" and that the Soviets used detente give themselves something of a breather." A balanced examination of our testimony conveys no such message. We stated explicitly to the committee that "our latest comparisons of U.S. and Soviet defense programs show that de- spite somewhat slower growth in recent years the costs of Soviet defense activi- ties still exceed those of the United States by a large margin. In 1981 the dollar costs of Soviet defense activities were 45 percent greater than U.S. out- lays; procurement costs alone were also 45 percent larger." Moreover, the com- mittee was reminded that the Soviet de- fense effort. still is running between 13 and 14 percent of GNP-that is, over twice the percentage of GNP devoted to defense spending in the United States. We also stressed to the committee that "trends in Soviet military spending are not a sufficient basis to form judgments about Soviet military capabilities, which are a complex function of weapons stocks, doctrine, training, generalship and other factors important in a potential conflict- The cost estimates are best used to iden- tify-shifts in priorities and trends in re- source commitments to military pro- grams over an extended period of time. Moreover; the spending estimates do not give an appreciation of the large stocks of strategic and conventional weapon sys- tems already deployed. Indeed, current levels of spending are so high that despite the procurement plateau noted, the Soviet forces have received since 1975 about 2,000 ICBMs and SLBMs, over 5,000 tactical combat and interceptor air- craft, 15.000 tanks and substantial num- bers of major surface combatants, SSBNs. and attack submarines." Finally, it is worth pointing out that Soviet efforts to develop advanced weapon systems continue in the '80s at least at the rapid pace of the previous two decades. Among these are fighter and airborne control aircraft, ballistic and cruise missiles, space systems and submarines. The new systems cover the full range of technologically advanced weaponry the Soviets will need to mod- ernize all major forces. In sum, Mr. Rosenfeld's description of our analysis does not, provide a balanced account of our testimony to the JEC. Our costing of the Soviet defense effort is very complex and susceptible to mis- representation and misuse. Those who oversimplify or cite out of context our work in this important area do not con- tribute to needed public understanding of these issues. They also do an injustice to the professional, independent analysts in all of the agencies of the intelligence community working to broaden our knowledge and understanding of the Soviet defense effort. GEORGE V. LAUDER Director, Public Affairs Office Washington Central Intelligence Agency Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 ARTICLE APPEARED CHRISTIAN SCIENCE MONITOR ON PAGE ,'7- .23 November 1983 Pentagon backs CIA view on ease-up in Soviet arms Washington The Pentagon agreed with the Cen- tral Intelligence Agency Monday that the rate at which the Soviet Union is adding new weapons to its military arsenal has flattened out since 1976. Senior intelligence officials cited a number of possible causes for this trend, including a Soviet decision to adhere to limits imposed by the unratified SALT II arms control treaty. _ The agencies emphasized their consensus on the state of Soviet weapons procurement, the largest chunk of the defense budget, and played down differences on total So-. viet defense spending, attributing them to accounting variables. The CIA computed annual growth in So- viet defense spending from 1976 to 1981 at 2 percent, while the Pentagon pegged it at 6 to 7 percent. President Reagan has justified his massive arms program by arguing that Moscow is engaged in an unprec- edented buildup. All signs suggest .the Soviets have more weapons sys- tems in the research-and-develop- ment stage than they did in either of the past two decades, an official said. Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B00420R000701450001-4 CHRISTIAN SCIENCE ISONITOR 2S.Noverrber 1983 ? According to these experts, this change in ying ' fen to d &F. Va se spending, which began in the mid 1970s?has sev i ? eral causes: The Soviets are.moving into more techno dow n-- vaet 0. .1 i logically sophisticated systems that present design and t ? __- , I development problems co s n Brad Kniz~rbocker Dunnup .~ intelligence analysts say Russians l tinning into delays, .cost overnIM Stat venter of The p>nsban Science Monitor "inwar:1; mey are holding to SALT I and oth eragreements tht Liitdi .am proucton of missiles,.: submarines, and ballistic missile defenses;- and :.they have had economic problems that disrupted the delivery-; of some-supplies to wea builders-- The-bottom line for=the-.CIA'-ii that the rate of crease is now around 2 percent a year, measured in iu tiles. The DIA, on the'other hand, says the figure should be 6 to 7 percent: The difference-is in whether to:.count inflation in th S i U e ov et nion Th CIA itbo .e puts at aut 3 pe cent D r en n intellieffiil genc ocas say its very You're an analyst at Central Intelligence A asi~ gency cally a barter-econom do snd tmheerref no dissrotha its bash- headquarters or the Pentagon and have the following as. -'What they both six anent: The Soviet Union has many more.fighter air- and said, `bet's beat otu swon is that ' ords into y to body sat back. Graf;, than the-United States, but-US pilots fly more so one senior P ughshares'," es ph stic:ated planes and get intelligence official Put .it. Measured .hart hone gate combat 50 percent more flying timeto bles,"they says the Sstill spends 25 percent' skills. Which country. will prevail in more on Procurement than the S. Measured in time of war7.,How should these facts affect US defense dollars, the ef spending? figure NmPs to 45 percent "When you spend a uarter to almost half of questionthat endlessly te Unitd States q again whatto US intelligence expertsT'heyare spends. -You a cn?Put a lot of new stuff d ineti-ita y. subjectiyE the field without having any growth in your _rate,of ?Thesearehekjnds e bly olitic l Y th p a et ey arecil t diis sdi"id "rucaoecsonpenng sa one intelligenceexpert. "This "is a coon n gton that Will certainly affect the.country_'s xe try with 50,000 tanks and they're still producing 2,500a. sPurces and could determine its survival. Year The US builds 700 to 800 new tanks a year. According to recently declassified intelligence esti~i officials say they first noticed the flattening, the Soviet Union over the past few years has six= of Soviet J defense increases several years ago, but assumed it n ficantly flattened its rate of increase .-q " spend - 9. ing. In the procurement of new weapons, the growth rate has dropped :to about zero. Pentagon critics have seized cn this to prove their point that administration plans to ? re.ann.A-nerica" are too grand. Proponents of a-stron- ger defense emphasize the half full part of the intelli- gence glass: that the Soviet Union, despite an apparent show r i shill d . more weaponry than the US. U S. And as usual,.the experts who gather and analyze such data are caught in the middle.. , : . "This stuff gets all twisted around in some of these budget.debates," grumbles one frustrated senior intelli- gence official. "We habitually get wrapped around. the axle. -hag to explain these things." defense :,att. intelligence ?wa am t.ue rneLornc and eV t, agency officials explained one. "The most important thing is said. the recent reports on Soviet economic choices they make." ng to be someofthe `?red fascina insight into how such spending Am ~d f- . Most rat US things deter- xnteliigeaoe anal n mined, why the internal debate among CIA and ,DIAde:~Yun '_dropvv .n lDefjMSe Intelligence Agency) analysts here. is ..8lmost mtLtary endmg?" ted FOne the o opcal, and what significance it.ha.s for US defense ORning. pro 4 ~, uces a lot ~- .. ' ~.~ aae. n' pen It ; kept happening, they re ta_ized they had a longer trend.. Why did it take so long to figure this out? This is the kind of question that hurts," said one senior intelligence offic there on ial. "We think we're rigs out the frontier of getting a glimpse into this to society. But it takes a long time for us to accum evidence to make these ' Mate the trail by several judgments, and the judgments do better at years.... Don't quote me, but were no predicting their technical bl pro ems tha we ne ar . rat Predicfing our own - _, e Taus Tn 0 ? heZ?tate to say what will follow `.. Approved For Release 2009/10/06: CIA-RDP86B00420R000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 ? But, warns a senior intelligence official: "All'f the signs we're looking at suggest that the Soviets have-more',, systems in research and development today than they've had in the last decade or any decade before that, that they have expanded the basis for modern systems pro- duction, that they see the world situation as one which is more serious than they saw it in the mid-1970s, and that there is evens, reason to believe that when when can, they sift attempt to return to the kind of dynamism in their, military programs that they exhibited during the -early 1970s." Which sounds very much like what the United.' Staths is doing. Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 6 Monday, November28, 1983 DEFENSE WEEK ? ? ? SOVIET DEFENSE Spending Reaches High Plateau As U.S. Continues Huge Increases The Central Intelligence Agency, in a major reassessment of its data and analysis on Soviet weapons production, has concluded that the USSR reached a prolonged plateau in military hardware spending as long ago as 1976. The weapons budget apparently has hardly increased since that year, according to testimony to the Joint Economic Com- mittee which was released last week. "Unlike our past estimates," the CIA report says, "the new evidence incorporated in our present estimate indicates that in at least one area, procurement of military hardware, Soviet expenditures have leveled off since 1976.... The Soviets did not field weapons as rapidly after 1976 as before. Practically all major categories of Soviet weapons were affected-missiles, aircraft and ships." Total Soviet defense costs, measured in constant 1970 rubles, grew at an average annual rate of four to five percent during the decade from 1966 to 1976, the CIA believes. The new estimate, though, shows that the growth in the economy and in the defense sector slowed since 1976. "The rate of growth of overall defense costs is lower because procurement of military hardware-the largest category of defense spending-was almost flat in 1976 to 1981," the CIA said. The Defense Intelligence Agency, which has its own view of Soviet military spending, apparently con- tinues to believe that Russian spen- ding is on the rise, however. Defense Secretary Caspar Weinberger last week said that there is "a difference between the agencies as to the rate of increase." He said it was "a small technical dispute." And Weinberger, who time and again has used the growth in Soviet military spending as justification for his own department's rapidly increasing pro- curement budget, said there is no question that the Soviet Union spends more on defense than the U.S. It takes a long time for the CIA to gather data about Soviet defense spending and to prepare analyses like this one, which set off a new round of debate in Washington over what some view as the need for mammoth increases in America's defense budgets. The intelligence agency remains about two years behind the pace of Soviet decisions, and thus has had little time to analyze changes in Soviet military spending that may have come with the rise to power of Communist Party Secretary Yuri Andropov. The latest CIA estimates were prepared before it became clear ear- ly last month that the new Soviet leader himself is seriously ill. "We have only very preliminary estimates available for 1982," said the CIA. "They indicate, however, that the trends in both total defense expenditures and procurement costs that we have observed since 1976 are continuing. The growth in total ex- penditures still appears to be con- siderably below the long-term average, and procurement spending remains roughly unchanged although at a high level, when measured in constant 1970 prices." Although the new report was seiz- ed upon in some quarters as proof that the Pentagon has been exag- gerating the Soviet threat all along, the CIA itself emphasized that its statistics are prone to error, and that spending is not the sole measure of military might. "It should be stressed that trends in Soviet military spending are not a sufficient basis to form judgments about Soviet military capabilities, which are a complex function of weapons stocks, doctrine, training, and other factors important in a potential conflict. "The cost estimates are best used to identify shifts in priorities and trends in resource commitments to military programs over an extended period of time," the report said. "Moreover, the spending estimates do not give an appreciation of the large stocks of strategic and conven- tional weapon systems already deployed. Indeed, current levels of spending are so high that despite the procurement plateau noted, the Soviet forces have received since 1975 about 2,000 intercontinental ballistic missiles (ICBMs) and sub- marine launched ballistic missiles (SLBMs), over 5,000 tactical com- bat and interceptor aircraft, 15,000 tanks and substantial numbers of major surface combatants, nuclear- powered missile submarines, and at- tack submarines." By the CIA's estimate, Soviet defense costs exceeded those of the United States by 45 percent in 1981, as did weapon purchase costs, despite the larger size of the suppor- ting U.S. economy. Indeed, it is the inevitable strain of military spen- ding on the economy which may have caused the plateau in weapons buying. In the Soviet Union, the CIA estimates, weapons cost about 25 percent more to buy than in the United States. "The slowdown in the growth of military procurement cannot be ex- plained by any single factor," said the CIA report. "Initially, at least, the absence of growth in military procurement might have been at- tributed to natural lulls in produc- tion as older weapons programs were phased out before new ones began. The extended nature of the slowdown, however, goes far beyond normal dips in procurement cycles. The continued slow growth since the late 1970s seems related to a combination of complex factors including technological problems, industrial bottlenecks and policy decisions." The CIA asserts that Soviet spen- ding on defense takes up about 13 to 14 percent of gross national pro- duct, or roughly double the American share of GNP spent by the Pentagon. But contrary to previous expectations, the Soviets have not been increasing this crucial ratio. Nor is the CIA persuaded that Andropov will make any substantial changes in the course set by Leonid Brezhnev during his heyday. "An- dropov's position on the share of resources that should go to the military is unclear," the new assess- Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 ? ment said. "The little evidence that is available indicates Andropov has not accelerated Soviet military spen- ding." This may be because of the economic pressures to invest in Russia's ailing civilian sector. Military buyers must compete with civilian consumers and industrial factory managers for scarce resources. The CIA expects this competition to become "increasing- ly fierce." The leveling off of weapons procurement in recent years coincided with an increase in the share of machinery alloted to civilian uses, the report said. "While we cannot be sure what Andropov's policy is, or will be, Soviet military capabilities will still increase substantially over the next several years even if the rate of growth of procurement of military hardware does not increase," con- cluded the report ominously. "The USSR is already investing so much in military hardware that merely continuing procurement at the ex- isting level would provide very large annual increments in holdings of military equipment." ? And the report suggested that the military, which helped bring the former KGB chief to power a year ago, may be pressing Andropov to speed up defense spending regardless of the economic conse- quences. "In the first three years of this decade we believe the Soviets have already had as many systems under development as in each of the previous two decades. Steady ex- pansion of production floorspace has occurred since the mid-1970s providing the Soviets with the potential to translate the new systems into deployments in the field, the paper said. "Any major effort to sharply accelerate the level of military procurement, however, could make it even more difficult to solve the fundamental economic problems facing the Soviets." Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 ARTICLE APPEARED- ON PAGE_ L1 NEWSWEEK 28 November 1983 Day eal'& Dep1oy Moscow may scuttle the arms talks, but Washington still hopes for a deal next year. n a quiet Sunday in Geneva c ? ? , o tet NATO into backing down, without giving arms negotiator Yuli Kvitsinsky tele- up anything in return. Reagan and his allies phoned his American counterpart, Paul called their bluff, despite the mass protests Nitze, with an "urgent" request for a meet- in Western Europe this fall. Italy's Parlia- ing. The two men had exchanged ideas in- ment formally endorsed deployment last formally mans times during nearly two week. West Germany is expected to follow years of negotiations on intermediate-range suit this week, and the first Pershing II nuclear weapons in Europe. In July 1982, missiles may arrive on German soil almost their celebrated "walk in the woods" out- immediately afterward. side Geneva yielded a compromise formula Political tensions are by no means over in that seemed to hold promise-until both West Germany; last week the opposition Washington and Moscow vetoed it. Now Social Democratic Party came out against Kvitsinsky wanted to try again. That after- deployment, shattering a consensus on de- noon, he and Nitze met at a park in Geneva fense policy that had kept the country on a to search for an 11th-hour understanding steady course for nearly 25 years. But if that might head off the deployment of new NATO can keep its collective nerve-and U.S. missiles. But the "walk in the park" led there's no sign that it won't-the arms talks nowhere. The next day, the first shipment of just might get back on track in time for an cruise missiles arrived in Britain, and de- election-year breakthrough. ployment finally began. As the deadline for deployment ap- For a while, there will be hell to pay. proached, both sides made halfhearted at- Antimissile protests will continue all over tempts at compromise. Reagan put on a Western Europe, with demonstrators ac- show of flexibility by proposing a "global" cusing Ronald Reagan of turning their limit of 420 intermediate-range warheads homes into targets. In the United States, for each superpower. That would mean a cut meanwhile, fact and fiction may combine to in NATO's deployment plan, under which produce agonizing second thoughts about 572 Pershing and cruise missiles, each with a the wisdom of nuclear deterrence. ABC's single warhead, are to be installed in West horrific "The Day After" (NEWSWEEK, Germany, Britain, Italy, Holland and Bel- Nov. 21) posed such an emotional challenge gium during the next five years. Reagan to Reagan's hard-line policies that Secre- wanted a corresponding reduction from the tary of State George Shultz was ordered Soviets, who currently have 243 triple-war- before the television cameras on Sunday head SS-20s aimed at Western Europe and night to pledge allegiance to arms control another 117 deployed in Asia. Moscow re- and stand up for a strong defense. Moscow fused to accept any U.S. deployment and will try to play on the anxieties about nucle- ar war. It may retaliate for deployment by According to U.S. officials, Kvitsinsky fielding new missiles of its own, and it is hinted at another proposal that represented likely to make good on its threat to walk out of the Geneva talks at the end of this week's a slight softening in the Soviet position. He session. said that if Washington offered to cancel its Bhff. Now that deployment has begun, entire deployment, the Soviet Union would however, Moscow is on the defensive even reduce its own European arsenal of SS-20s more than Reagan. The Kremlin gambled to about 120 missiles. Moscow also would and lost. In 1979, the NATO allies agreed to surrender an important bargaining chip, its start deploying a new generation of missiles insistence that 162 British and French mis- at the end of this year unless agreement was riles be included in any superpower agree- reached on withdrawing some of Moscow's ment on theater weapons. Instead, the Brit- powerful SS-20 missiles from the European ish and French missiles would be dealt with theater. The Soviets hoped they could bluff in another forum, possibly the parallel ne- gotiations on strategic-arms reduction. C0]\7I'\7'ED Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Kvitsinsky's demarche fell so flat that by hind the "two-track" NATO policy that the end of the week the Soviets were claim- ing it was all Nitze's idea. "Every proposi- c called its nnlcclearent forces year Europe. Now, tion the Soviets have made to us would leave the United States with zero and the Soviet under chairman Willy Brandt, another for- mer chancellor, the party is moving back Union with several hundred warheads," ! said the neutralist doctrines it advocated id Assistant Secretary of Defense Richard in the 1940s and '50s. After the SPD's gov- Perle. "Their basic objective is to kill our Prnment fell in )?982, Brandt convinced his deployment while preserving the monopoly they colleagues that the party could regain pow- ploy, enjoy." Reagan didn't go for the by appealing ,to peace-movement ploy, and neither did his European allies. er only members who had taken to voting for the Surprise: Despite all the anticipation, the actual afrival of cruise missiles in Britain counterculture Green Party. He also ar- came as something of a surprise to the anti- gued that West Germany's future economic missile movement, and apparently to the health depends on its trade with the Soviet British government as well. Most of the bloc, which could be interrupted by a new protesters camped outside the air base at cold war. Greenham Common were still asleep when Brandt pressed the attack at last week's an American transport plane landed in the party convention. "The two superpowers early morning and began to unload the mis- are stronger than is healthy for the rest of the siles in their long, canvas-covered contain- world," he said. "In this situation, it would ers. Defense Secretary Michael Heseltine, advisable for Europe to increase its who was visiting another military base at the time, politically and in defense." Brandt me, had to rush back to London to inform Parliament that the eagle had land- was careful not to call for West German T h h d ? no ca , a o e er a lackey to the Americans." "You are talking absolute rubbish," the Iron Lady replied. The Italian government had an easier e sai t e withdrawal from NATO, but ed-apparently a day early, in order to fore- alliance needed a "shift in influence." Look- stall demonstrations. ing tired and old, Schmidt made a forlorn The protesters revved themselves up any- effort to stem the tide. Conceding that way. About 300 of them were arrested out- ! Washington was partly to blame for the side Parliament. In Manchester, a picketer failure of the Geneva talks, be insisted that squirted red paint onto the unfortunate He- "so long as there are Russian missiles in seltine as other demonstrators chanted: Eastern Europe, the United States must re- "Better red than dead, Michael!" At Green- main engaged in Western Europe." When ham Common, 140 protesters were arrested the speeches were done, the delegates voted for blocking roadways; they warned that overwhelmingly to oppose deployment. bigger confrontations would occur when Deployment was under way nonetheless, the mobile missiles were driven out of the and it was likely to provoke a belligerent base for operational testing. And in the reaction from Moscow. In Geneva, the So- House of Commons, Prime Minister Mar- viets warned that they would walk out this garet Thatcher had to endure a scathing week if the Bundestag voted to accept Per- attack from opposition leader Neil Kin- shing IIs. The current round of talks was ~k h ll d h " time of it as Parliament voted, 351 to 219, to accept deployment of cruise missiles at a base in southeastern Sicily. In West Ger- many, the only country scheduled to receive the more lethal Pershing Us, the govern- ment expected a similar outcome when the Bundestag votes this week. "The Soviet Union played a daring poker game and for a long time did not believe, or did not seem to believe, that we would ... deploy," Chan- cellor Helmut Kohl said during a television interview. With a 60-seat edge in the Bun- destag behind him, Kohl believed that the game was over. The Social Democrats thought it was just beginning. In 1979, their own chancellor, Helmut Schmidt, was a prime mover be- due to end soon anyway, but the Soviets may well choose to cut if off with a flourish, In addition, Soviet Defense Minister Dmitry Ustinov said the Kremlin would respond with new SS-20 deployments in the European theater and the introduction of new tactical nuclear weapons into Eastern Europe. He also warned of measures aimed directly at U.S. territory, so that "the Americans will be bound to feel the differ- ence between the situation before the de- ployment of their missiles in Western Eu- rope and after it." Ustinov didn't specify what steps would be taken. But Pentagon officials thought the Soviets might station .SS-20s in Siberia, within range of the West Coast, or deploy SSN-X-21 cruise missiles aboard submarines operating off either American coast. The actual depth and intensity of Mos- iCONTIVL Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 cow's reaction to deployment will be diffi- cult to predict as long as it remains unclear just who is in charge at the Kremlin. Presi- dent Yuri Andropov was still in mysterious seclusion last week. In his absence, rumors flourished; one London newspaper even re- cycled the tired old story that Andropov bad been shot by a disgruntled member of the Soviet establishment. Western diplo- mats in Moscow were inclined to believe that Andropov was suffering from a kidney a;lment. His next obligatory public appear- ance is a meeting of the Supreme Soviet, which has been scheduled for late next month, apparently to give him as much recovery time as possible. Meanwhile, the tough Ustinov seemed to be Moscow's point man on the deployment issue. Reading Soviet intentions and capabili- ties has never been Washington's strongest suit. Reagan maintains, for 'example, that the Soviet economy is crippled, but that the Kremlin is pushing its military buildup, come hell or high water. Last week a new CIA study suggested that the president was off target on both points. It said the Soviet economy was on the mend, predicting a relatively healthy growth rate this year of 3.5 to 4 percent. It also found that the growth ofSoviet military spending began totaperoff S as long ago as 1977.? Since then, military spending has increased by about 2 percent 'a year, less than half the rate that prevailed from 1966 to 1976. The CIA reported that "procurement of military hardware-tbe largest category of defense spending-was almost flat in 1976-81." The bottom line seemed to be that the Soviets are m orefornii- dable economically, and less single-minded militarily, than Reagan believes. Despite the clouds in its crystal ball, the administration believes that the start of de- ployment will not keep the Soviets away from the bargaining table for long. Some high-ranking U.S. officials believethe Gene- va talks may resume as early as mid-January. That forecast could prove to be overly hope- ful. But the Soviets may be realistic enough to recognize that they failed to stop deploy- mentby political means and that thetimehas come for serious negotiation. The United States is in no hurry to deploy all 572 of its new missiles. If the Soviets decide that a small deployment is preferable to a large one, there will be plenty of time left in which to find a reasonable compromise. Whatever qualms Americans may feel on the morning after "The Day After," there is still reason to S believe that arms control can play its part in averting a nuclear catastrophe. RUSSELL WATSON with KIM WILLENSON and JOHN J. LINDSAY in Washington, RONALD HENKOFF in Geneva, ROBERT B. CULLEN in Moscow, THEODORE STANGER in Bonn and bureau reports Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 ARTICLE APPEARED VILLAGE VOICE ON PAGE 3 ? 29 November 1983 PRESS C By Alexander Cockburn Arms Race Over- -Suppose Reagan will be calling the whole arms race off, now that it turns out that increases in the Soviet defense budget, long hailed as even bigger than the sum total of ? the annual . salaries of 'Dan Bather, and .Bill Moyers, have been modest in the extreme since 197& The New York Times reported this interesting bit of informs. lion -in a story on page 6 of its Saturday edition.. . The CIA now says that the rate of growth of Soviet military spending from 1976 tto'the present is half what it was in the preceding -decade, from 1966 to 1975. Whereas . in the earlier period Soviet .military outlays were supposedly increasing by 4 to 5 per cent a year, they are now growing, says the CIA, at about 2. per cent a year. ::The 1984 Pentgon budget represents a.5 per cent real increase, ,discounting inflation,-,over'the '83 levels. Cap Weinberger, irked at this paltry surge, is hoping to get a '17 per cent .hike nertyear. ~.:: .. ' In'short, the Russians are* bunch of pacifists, barely sustaining areal growth in their military 'spending. Are they men or mice?' In the. primaries for the General doubt Secretaryship, Andropov's would-be successors will no charging "a decade-of neglect" and "a window .of vulnerability." Of course all CIA' tes of Soviet mMtary per- formance are extremely suspect, in that they are calcu- lated on the baiis:.of US . military -costs. In Ernie Fitzgerald's immortal words, "Every time there's a cost overrun- on the B-1 bomber; the'Soviet defense budget goes up." In this casethe lowered estimate is based on the fact that the Soviet Union is producing fewer weapons. ! Thus there's probably-some truth in what the CIA says. -Given Reagan's perpetual exaggerations it's an impor- tent story. The NYT - and other papers gave it serious.' .space. Puzzling all the same why they waited till Novem 'her 19 to break the news. The Joint Economic Commit- tee, which released :the CIA statement, ' has -tried to publicise these conclusions four time already this year. Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B00420R000701450001-4 WALL STREET JOURNAL 6 December 1983 -V by the CIA Undershoots Soviet Ln, Xk%,Wzov - , Soviet output in order to make Its military Every year the Central Intelligence setor look small. Thus, this office claims makes public two estimatecru-that the Soviet national its in dollars r can Agency cial for Western policies: "Soviet defense erwas. as of part. The e976, CIA's 67% of ts American c spending" and its rate of growth. The GNP rdollars for latest the e same year Se year is agency's latest numbers are being used to 73 ratio a favorable e ss down the deed for a U.S. reamament T3.7%-more to the Soviet econ- play polio Some background than the national income ratio. Actu- Y. ground is in order. ally, the GNP ratio must be far less favor- Before 1976, the CIA's estimate of So- able to the Soviet economy than the na- viet defense spending hovered around 6?o tional income ratio, -since the latter disre of the Soviet gross national product- gards services and plant depreciation. and roughly matching the American percent- age. The "Soviet defense burden," the CIA S is precisely those two areas that the stated in 1973, "`is no Soviet economy y lags farther behind the greater than that of U.S. than it does in'-goods. the United States," and the "Soviet share The CIA reports give no sources for bf gross: national product spent on defense data. An American unfamiliar with the So. 'has been falling." This good news nurtured viet press is likely to infer that those are detente and sapped the stronger defense secret intelligence sources. Actually, they policy. In 1976, the CIA announced that ev are "open" Soviet books and pamphlets- ery year it had been making a 100 %o error: i.e., Soviet propaganda-since the CIA has Soviet defense spending had been closer to never been able'to obtain 'closed" Soviet 12;'0, not 6%, of GNP, and had been grow- statistics. mg since 1966 at 417o to 5%. It was time for In its American-Soviet GNP compari- detente to wane and for defense to wax. sons, the CIA uses a methodology appro- According to the CIA's testimony this priate for comparing the GNPs of the U.S. year before Congress's Joint Economic ' and, say Western Europe. Thus the CIA Committee, released to the press last ignores, in terms of both cost and value, as a 66-page report, Soviet defense the Soviet lack of Western diversification, has been growing not at 4% to innovation and sophistication of consumer ut at "about 2% a year ... because goods and services, as well as of trade It- procurement of military hardware-the self, whereby the right goods and services largest -category of defense spending-was reach the right customers at the right . almost flat in 1976-81." And, according to time. Using the CIA's methodology, It can "preliminary estimates available for be proved that even Soviet labor-camp in., 1982," the "trends .. , are continuing." mates consume, in terms of dollars Now It is time for opponents of Mr. Rea- bies, not so much less than median-income gar's defense policy to rejoice. Americans. That the CIA's estimates of the Soviet Having inflated the Soviet GNP more GNP share spent on defense are absurd is than Soviet propaganda obvious at a glance. ? About 300.000 engi- if only for that reason, " ovietd CIA neers and.400,000 "junior engineers" are spending" as an absurdly low ? percentage graduated in the U.S.S.R. annually, and of GNP. hall -of these 700,000 go into the military sector; in the U.S., 60,000 engineers are There are other reasons. As is clear pp4--Int r ,r,'P~P/:p "ED a t; V f' graduated, and only one-fifth of them go even from the reports, the CIA has no hu- into the defense Industry. The expenditure J man agents at -the top of the Soviet infra- ratio In this area is thus almost 60 to !, structure. Thus, it can perceive and evalu- considering the fact that the pay of ate the weapons tested, built or deployed military engineers is on the average twice under optically or electronically observ- as high as that of civilian engineers. How able conditions, but not the weapons devel- can the Soviet economy pay for such ratios oped, produced, stored or deployed on opti? if Soviet defense spending as a share of cally and electronically closed premises. It GNP roughly matched its American count- can't know to what extent each "civilian" . g , erpart according to the pre-1976 CIA, and institution works as a military one. With Recently, former Soviet economist Igor is only about twice as high according to the the greater importance paid nowadays to Birman -made a painstaking study showing post-1976 CIA? 1 high-technology surveillance, as opposed to that the CIA doesn't know the Soviet econ- The key to the CIA calculus is the So the former belief in the necessity of agents omy as it exists, but as it seems on the viet GNP. Yet the CIA can't now calculate In place, the discrepancy between what is I basis of purely American experience and Tv'P for the U.S.S.R.., if only because observed by the CIA and what actually oc- open., Soviet statistics. The CIA has viet goods and services are priced curs has only widened. Nor does the never budged, and possibly never will. t; and few of them cart be sampled agency allow for the fact that civilian pro- evaluated, since they are foisted on duction mainly receives those human and So riet consumers far from foreign eyes: other resources rejected by the military. Predictably, the Soviet Central Statist- While 'the CIA's "Soviet defense spend- ical Office inflates the value of the oveiail ? ing" is an imaginary "shaggy dog" that the CIA car. reshape at will, the rate of that spending's growth is an imaginary flea on that imaginary dog: If the CIA an- nounced in 1976 that its "Soviet defense spending" bad been wrong by 1005, how can the CIA presume that it increases at "about 2%" and not 4% to 5P%? "The slowdown in Soviet ? military growth" is the only new fact In the CIA's testimony this year. Just Like its predeces? sots, It is a digest of the Soviet press. Thus we learn that in 1952 the Soviet economy produced 147 million tons of steel, compared with 66 million tons produced in the"" .S. But what does the regime do with all that steel, considering bow little goes into can, housing and highways, and -consider ing how much rolled steel ($5.3 billion a year) the regime imports? The answer is missing in this year's CIA report, just as it was missing 10 -years ago. The -CIA report abounds in slogans lifted 'unthinkingly from the Soviet press. "Production of fruits and vegetables reached record levels.... " "Meat output .. reached a record level ........ Rail. road performance has also , improved markedly.... .. Andropov's regime "has shown concern for the welfare of the popu- lation.. " The latter is a Soviet cliche In use since 1918. In 1977, the CIA made the groundless and indeed preposterous prediction that the Soviet economy faced an oil crisis; this year, the CIA explains that the Soviet economy "has thus far averted the down- tam In oil production ... by virtue of an enormous brute-force development effort. .., " as though there is a Soviet national . development effort that can't be credited to brute force. The CIA is a closed, noncompetitive bu- reaucracy that is practically unopposed, since most of the major news media agree with its intelligence. All attempts to expose its scholastics have failed. Thus, in 1978 1 submitted to the CIA a 150-page analysis of its reports and then distilled my paper into an article for Commentary that Ronald Reagan and his associates hailed enthusi- astically. But that applied to Jimmy Car- ter's CIA. When the CIA became Mr. Rea- the enthusiasm evaporated an's Mr. Navrozov, a Russian emigre, writes frequently on Soviet affairs and intelli- gence matters. ? . Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 ? ? ? Christian Science Monitor, January 21;?, 1984 p. 7 Slower. rise=fore Soviet spy to The Christian aclance Monitor ?.. ''There is evidence of large numbers of Brussels new programs at the. research and devel The momentum of `Soviet military opment stagethe recent summary' spending in the last several years has notes. 'It specifies thatabout as many sys- slowed to about half the rate sustained in'~ tems are in the development stage at the the early 1970s, according to-the` outlines-,beginning of this decade as there were at of a study by NATO experts. 'the beginning of the 1960s and'70s. The report is a short update of a more "It is projected that more systems will complete, study by ' NATO and national reach initial operational capability in the experts lash year. That 1980s," it adds, "than in report had already OW either the 1960s or hinted at a possible 1970s. slowdown in the Soviet r s Among the new So- ey David Fouquet . to the armed forces the 1970-76 period and `MnrpSoviet systems will systegis, and. sua- about 4 to 5 percent in cruise missiles, space Union's military ' . z x o v~i- Viet. weapons systems buildup because of said to be approaching emerging economic and such a level of readiness production 'difficulties. are fighter,airborne It estimated increases in warning, and control Soviet arms spending of Soviet surface-to-air missiles aircraft, ballistic and against some - official .. in the 1960S or 1970S.' duction facilities have American and other been . expanded, which pronouncements, :? that ':t-'' could imply a resump- still paint a portrait of a'relentless Soviet `tion of the rate of Soviet defense growth of arms drive. Nevertheless, they underline the early 1970s'?`: that Soviet military outlays between 1976 The slowdow>d;in recent years could and 1982 `:'continued at a very high level" have' resulted from` a general Soviet eco- and that the Soviets could be on the verge nomic slump,, supply bottlenecks, or diffi .of, introducing a large number `of' new"` culties in introducing 'advanced technol= weapons programs. . ogies, rather than a formal policy decision - 1,4 Between 1976 and 1982, large , Panti:`r from the leaderphip 'ties of equipment -includin g 15 major , ' , The report also concludes that "any surface ; , combat ships, "about 2,500 .major effort to accelerate sharply the level intercontinental nuclear missiles and sub-^' of military procurement could exacerbate marine-launched missiles, 6,000 tactical Soviet economic problems and would combat 'and interceptor aircraft, and pose particularly difficult choices of re. about 15,000 tanks'- have been delivered ' source allocation." J976 i61982. .-reach initial operational i ?, The -NATO report Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Defense apenuing; V n u le UV JL 17 V V LC I CLL U U'.kS Tothe Editor: are. A Soviet worker in the civilian cony. As such, spending should be ex- Adams's Jan. 10 OP-Ed ar- economy is far less productive than his pressed as a percentage of society's ? ? ? tp fotmded assertions which 4eny va- the military is less. Yet it does not fol- coming up with a dollar expression of Tense spending under President Rea- gan has been unnecessarily high. Mr. Adams begins by saying the Administration's defense budget is based on estimates of Soviet military spending. He maintains these esti- mates "vastly overstate" actual Soviet arms spending because of the methodology used. Then, shifting ground, be implies the Administration rejects the spend- Ing estimate (i.e., input) approach, focusing instead on "production and large stockpiles" of Soviet weapons ", : (outp t measures). This latter ap- t"-"*oaidi fafls toj our b , aa- cording to Mr. Adams, because the strategic and conventional military balance is approximately even. Mr. Adams's statements about the military balance are not supported by argument, and his vague reference to data amassed" by various authori- fles is no substitute for analysis of this critical issue. More interesting is his contention that the C.I.A. overstates Soviet mili- tary spending by estimating what it would cost the U.S. to match the Soviet level of military output. 'bur wage and material costs," says Mr. Adams, "are higher than Moscow's." In the strictest sense, they low that the C.I.A. has been overstat- ing Soviet arms spending or that our defense budget is too high. Consider: ? The only valid criterion on which to base the U.S. defense effort is Soviet military output - both in quantity and in quality. We must be able to match Soviet military capabilities to the ex- tent necessary for deterrence. ? Soviet military spending is rele- vant as an indicator of the priority as- signed to the military sector, and the burden this sector places on the econ- THE NEW YORK TIMES, FRIDAY, JANUARY 27, 1984 rough idea of absolute levels of re- source commitments to the Soviet military sector. Since most Americans are unfamiliar with the Soviet econ- omy, it is hard to visualize X percent of Soviet G.N.P. But we know that Y billion dollars represents so many man-years of trained personnel, so many vehicles, ships, etc., in our own economy. For this purpose, the C.I.A. methodology, so derided by Mr, Adams, is entirely appropriate. Mr. Adams seems to think that the dollar figure for Soviet arms spending should be based not on American re- source costs but on Soviet ones. Such a figure would be meaningless. For ex- ample, the Soviets "pay" their con- scripts 5 rubles a month - $8 at the of- ficial exchange rate. That compares with several hundred dollars a month spent by the Pentagon to hire a volun- teer away from the private sector. . Using Mr. Adams's approach, we would conclude the Soviets are spend- ing far less on soldiers than we are. Yet a Soviet infantryman wielding a ltalishnikov rifle is every bit as much a fighter as a U.S. Private with an M-16. It would be absurd for us to base our manpower spending on the IS fiig- ure or, for that matter, on any other version of Soviet manpower costs. Output is what counts. The same applies to other areas of the military. After criticizing the C.I.A.'s esti- mates for the past seven years, Mr. Adams is only too happy to embrace their latest downward revisions of Soviet arms spending. Indeed, the C.I.A.'s track record in forecasting key internal variables for that coun- try has been dismal (in 1977 it pre- dicted a Soviet "oil crisis" that never materialized). But the evidence, specially from former Soviet economists and other experts with firsthand experience in the U.S.S R., suggests the C.I.A. has c nsisten.; underestimated S" t arms spending and continues to do so. In 1976, for instance, the C.I.A. an- nounced it had been off by 100.per- cent in its assessment of the Soviet defense burden. The figure was' re- vised from 6 percent to 12 percent of G.N.P. As Lev Navrozov pointed but in a recent article, even these higher figures do not account for the fact that the Soviet military employs 13 times as many engineers as the-U.S. military, or that the U.S.S.R. pr'o- duces twice as much steel as the U.S. but uses less in the civilian economy (where does the rest go?). The C.I.A. is a dosed, noncompeti- tive bureaucracy with few reliable sources within the U.S.S.R. It relies heavily on official Soviet statistics for its estimates. There is little ground for Mr. Adams's new-found faith in them. DAVID A. MORO New York, Jan. 15,1984 The writer is a financial analyst at Approved For Release 2009/10/06: CIA-RDP86B00420R000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 plans for the pending deployment of new cruise missiles on submarines stationed near the US coasts. This an- nouncement followed Moscow's walkout at the Intermediate-range Nuclear Forces (INF) reduction talks in Geneva. The Soviets have por- trayed this action as retaliation for US deployment of Pershing II and IN FOCUS... "lowest since World War II," the intel- ligence report disclosed. Per capita consumption was on a roller coaster, increasing by about one percent in 1981 and decreasing by the same rate in 1982. The avail- ability of quality foods the CIA anal - , y the Central Intelligence Agency's Of- sis finds, has generally declined, with fice of Soviet Analysis as suggesting per capita meat consumption in 1982 that Soviet defense spending was de- down from the peak level in 1979. clining. The CIA report, released by Some signs of unrest-such as the Subcommittee on International "short-lived work stoppages"-oc- Trade, Finance, and Security Eco- curred in 1981 and 1982, according to nomics of the Congressional Joint the CIA, but "expressions of discon- Economic Committee, does not sup- tent generally were contained or port such a conclusion. Instead, there averted. Faced with long lines at state is the straightforward assertion that outlets, consumers dealt with the "Soviet military capabilities will still shortages in ways that did not threat- increase substantially over the next en the regime-by buying higher- several years, even if the rate of priced foods in the officially sanc- growth of procurement of military tioned free markets, for example, and hardware does not increase. The through barter and black-market ac- USSR is already investing so much in tivity." military hardware that merely con- In the defense sector, the CIA analy- tinuing procurement at the existing sis finds that while spending mea- level would provide very large annual sured in constant 1970 ruble prices increments in holdings of military continues to increase, the procure- equipment." ment of military hardware has level- The CIA analysis finds that the new ed off since 1976. Overall defense regime headed by President Yuri An- spending, in step with overall eco- dropov, who "apparently came to nomic growth, has slowed since then power with the support of the military, to an annual growth of two percent may well be under pressure to speed because of the lower procurement up defense spending. For example, in trends, according to the report. This the first three years of this decade we relatively flat growth level of the pro- believe the Soviets have already had curement account is in contrast with as many systems under development annual increases in military opera- as in each of the previous two dec- tions and maintenance costs in the ades." three to four percent range and Pointing out that the steady expan- boosts in military personnel costs by sion of Soviet production facilities slightly less than two percent a year. provides an increasing potential for Stressing that trends in Soviet mili- fielding an ever-increasing volume of tary spending are not a sufficient weapon systems, the CIA study then basis to form judgments about Soviet juxtaposes the fact that "any major military capabilities, the CIA analysis effort to sharply accelerate the level warns that these derive from a com- of military procurement, however, bination of weapons stocks, doctrine, could make it even more difficult to training, leadership, and other fac- solve the fundamental economic tors. Moreover, spending estimates problems facing the Soviets." The don't allow for the "large stocks of consequence of drastic procurement strategic and conventional weapon boosts, the CIA argued, would be systems already deployed. Indeed, lower civilian investment and slower current levels of spending are so high growth or even a falling per capita that, despite the procurement plateau consumption rate and "could, over noted, the Soviet forces have re- the long run, erode the economic ceived since 1975 about 2,000 ICBMs base of the military-industrial com- and SLBMs, more than 5,000 tactical plex itself." combat and interceptor aircraft, The CIA reports that the Soviet 15,000 tanks, and substantial num- Union's economy is lagging behind bers of major surface combatants, the goals set for it in the current Five- SSBNs, and attack submarines," the Year Plan (1981-85), with the slow- CIA reported. down evident "in practically every Despite the somewhat slower industrial branch" and industrial pro- growth in Soviet defense spending, ductivity "down dramatically." In the the USSR continues to outspend the important area of machine buildin US "b I ground-launched cruise missiles in Europe. Ambassador Adelman dismissed the lattgr Soviet contention as a case of "putting a new label on old wine." Portraying these actions as., counter- deployments" simply won't wash, he suggested, because evidence built up over "years and years" shows clearly that the Soviets planned to do so all along. Soviet infractions of arms accords are not confined to ballistic missiles (see "The Soviets Are Violating Arms- Control Accords," October'83 issue). Among the latest evidence that sug- gests noncompliance are reports by Defense Department officials that the Soviets are building between thirty- six and forty Backfire bombers per year. On June 16, 1979, President Leonid Brezhnev informed the US SALT II negotiators-headed by Pres- ident Jimmy Carter-that the produc- tion rate of the Soviet Tu-22M aircraft, known in the US as the Backfire bomber, would not exceed thirty air- craft per year. The US accepted this pledge with the proviso that "the United States enters into the SALT II Agreement on the basis of the com- mitments contained in the Soviet statement (concerning Backfire] and that it considers the carrying out of these commitments to be essential to the obligations assumed under the Treaty." A production rate in excess of thirty aircraft a year obviously vio- lates this stipulation. In another recent development that raises questions about Soviet compli- ance, US intelligence found that two squadrons of Backfire bombers have been assigned to a Long-Range Avia- tion (the equivalent of SAC's bomber element) base in the upper part of the Kola peninsula north of the Arctic Cir- cle. Brezhnev's written statement on Backfire appended to SALT II asserts that the Soviets "will not increase the radius of action of this airplane in such a way as to enable it to strike targets on the territory of the USA." Forward-basing a number of these aircraft in the Kola peninsula does ex- ctly that, however. Soviet Defense Spending Grows Substantially A saw fit to number of US interpret a news recent media reports report by 9, y a arge margin. in 1981 the which affects both military hardware d ll o ar costs of Soviet defense ac - as well as the civilian sector in a pace- tivities were fort -fi t y ve percen greater setting fashion, growth has fallen off than US outlays; procurement costs to about half the planned level, the alone were also forty-five percent 18 AIR FORCE Magazine / January 1984 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4 larger." The current plateau in pro- curement spending appears to be re- lated to a combination of complex factors, including technological problems, industrial bottlenecks, and policy decisions. Some funds origi- nally budgeted for procurement, the Agency suggests, may have been di- rected instead to research, develop- ment, test, and evaluation (RDT&E) "because of the increasing complex- ity of weapon systems being re- searched." Defense Against Ballistic Missiles On April 18, 1983, the White House directed relevant elements of the ex- ecutive branch to undertake two complementary studies of the feasi- bility of a comprehensive defense against ballistic missiles. The find- ings of these studies-one dealing with the technological and the other with the strategic doctrinal aspects of such an undertaking-were turned over to the President, and at this writ- ing he is reportedly close to making a decision on a DABM (Defense Against Ballistic Missile) program. The Subcommittees on Investiga- tions and Research and Development of the House Committee on Armed Services recently held intensive hear- ings on DABM approaches, with the Defense Department's Under Secre- tary for Research and Engineering, Dr. Richard DeLauer, acting as the principal government witness. As- serting that an effective multiple-lay- ered defense may become feasible by about the year 2000, he warned, how- ever, that the "most fragile part" of such a concept,is its ability to survive "counteractions that might be taken against it." Dr. DeLauer predicted that a com- prehensive defense against ballistic missiles will have to cover four dis- tinct phases of a ballistic missile's tra- jectory-the boost, post-boost, mid- course, and terminal regimes-be- cause defense in one phase alone probably would miss too many "leak- ers." Interception in the boost phase is both the most effective and difficult element of DABM, he told the panel, because detection, discrimination, targeting, and interception would have to be accomplished almost in- stantaneously. Further, the attacker might try to confuse the defender with large numbers of decoys. In the post-boost phase, the de- fense still has a chance to destroy several warheads at once, before they have been directed against individual targets. Pointing and tracking as well as discrimination of decoys as op- posed to legitimate targets during IN fOCUS.> this phase are probably easier to ac- complish than at other times, he sug- gested. Mid-course defense, Dr. DeLauer predicted, will turn out to be more difficult because it becomes neces- sary to discriminate between debris, decoys, and the individual reentry ve- hicles, which by now have separated from the boost-post vehicle, or "bus." In the terminal phase, discrimina- tion is somewhat easier because the atmosphere sorts out lightweight de- coys from the heavy, shielded reen- tering warheads, but there is only a short period during which intercep- tion can be accomplished. The Defense Department's ranking technologist dismissed as "loose talk" the notion that the US could at- tain an effective DABM capability with a level of effort comparable to the World War 11 Manhattan Project that produced the A-bomb or to NASA's Apollo program that landed man on the moon. The difficulties associated with fielding a workable DABM, he told the congressional panel, are equal to or exceed those of the Man- hattan Project in each of such individ- ual component areas as battle man- agement, pointing and tracking, and interception and destruction. Singling out battle management as the "most awesome" task associated with DABM, he said some of the as- sociated functions "we can't do yet." He added that neither the computers nor the hardening against counter- measures needed to perform this kind of battle management exist. Kill mechanisms that are candi- dates for various phases of DABM in- clude pulsed and continuous-wave laser designs. He singled out pulsed shortwave lasers of either the X-ray or excimer (rare gases) type because of their potential capability to deliver a high impulse or shock to a missile to break or blow a hole in it and cause structural collapse of the booster. Free-electron, excimer, and hydro- gen fluoride/deuterium fluoride lasers emitting energy in a continu- ous wave could be used to dwell on a target until a hole is burned through it. Continuous beams of neutral parti- cles, Dr. DeLauer said, are potentially capable of destroying internal com- ponents of reentry vehicles and, therefore, will be worked on further under the DABM program. Kinetic energy rail guns and minia- ture homing vehicles will similarly be explored because of their "hit-to-kill" potential. The cost of an operational DABM system, according to Dr. DeLauer, would be "staggering," with the R&D phase over the next five years alone ranging between $18 billion and $27 billion. Washington Observations * Dr. William Perry, former Under Secretary of Defense for Research and Engineering, recently predicted at a symposium sponsored by the MITRE Corp. that the "cost perfor- mance" of computers will go up a thousandfold over the next ten years. The payoff in the defense sector from such a staggering advance might well be the capability to deter conven- tional warfare with conventional, nonnuclear weapons. Embedded computers, he suggested, might be imbued cost-effectively with a level of artificial intelligence that approaches human intelligence. tit Air Force Chief of Staff Gen. Charles Gabriel recently told an AFA meeting that some 800 Air Force peo- ple were involved in the Grenadian rescue operation. MAC, TAC, SAC, and Communications Command pro- vided the bulk of the personnel. Be- tween 300 and 500 USAF personnel "were on the ground" at one time or another, mainly to perform security tasks, he said. SAC's role was intelli- gence collection and aerial refueling. TAC provided F-15 and E-3A AWACS aircraft, he said, adding that some of the command's A-10s "were de- ployed but not used." Some of MAC's C-130s had "some holes in them but made it, [and] the AC-130s were most useful" in shutting down hostile gun positions. (For more on the Grenada opera- tion, see "Blue Christmas Coming Up," p. 78.) * With a Unified Space Command apparently slated to come into being in 1985, concern is mounting about inadequate physical security at the Space Command's Headquarters located in downtown Colorado Springs, Colo., in a commercial build- ing rented by the General Services Administration. Heavy civilian truck traffic in the neighborhood of the building and the known existence of a Marxist cell in Colorado Springs create a security nightmare for what is, in effect, America's first line of stra- tegic warning. Plans for a new build- ing have been slipped to FY '87 be- cause of budgetary pressures. ^ AIR FORCE Magazine / January 1984 Approved For Release 2009/10/06: CIA-RDP86B0042OR000701450001-4